Question

Explain Market Efficiency. ( write 500 words)

Answer 1

Market efficiency is the term used to refer the degree of information made available to all the buyers and sellers to get the max opportunity to do business with least cost.

The term market efficiency is taken from a paper written in 1970s by economist Eugene Fama .

The concept of market efficiency is so broad and dynamic that no singel definition at present to encompass all of its theoretical and practical implications.

Importance .. The aim of overall market efficiency is to provide goods to the consumer in required form ,

Time ,place , with lowest possible marketing costs.

Market efficiency is broadly classified into 3 categories they are as follows

1. Weak

2. Semi-strong

3. Strong

In a efficient market no one has separate access to any special information to make an extra profits .

Another important point is that if markets are efficient the price should not be effected by any information that was well anticipated by the investors .

One of the factor that affects the market efficiency is availability of information . A higher availability of information will lead to higher efficiency of markets.

One of the major factors affecting the market efficiency is transaction costs and other costs associated with trading . As long as the costs are high the markets are inefficient, similarly when costs are low then markets are efficient.

Weak form of market efficiency .. when the current prices fully reflects all the past market data , then the buyers can not forecast the future prices.

Semi-strong form of market efficiency .. It states that the current prices reflects all publicly available information including the past information. It encompasses the weak form of market efficiency.

Strong form of market efficiency.... States that the price incorporates all the information available that includes the public and private information.

Even if everyone had all the same information there is no reason to assume they would reach the same decision as to the appropriate price. For example in a chess tournament all the players know the same rules, and have access to the same chess books , yet only a small minority member will excel.