Question

what does it mean for financial market to be considered (a) informationally efficient and (b) economically efficient?

Answer 1

a.Market efficiency means that the prices factor all publicly available information. There is no way to beat the market. The theory of efficient market hypothesis was developed by Fama and French. Efficient market hypothesis states that the financial markets are informationally efficient. They state that it is impossible for an investor to beat the market since market anomalies do not exist.

Informational efficiency is achieved when timely and accurate information is available. Prices rapidly adjust to new information.

Efficient Market Hypothesis:

1.Weak form efficiency: Weak form efficiency assumes that all available information is reflected in the prices. So, it is not possible to use technical analysis to achieve high returns.

2.Semi-strong efficiency: Semi-strong efficiency assumes that stock prices have been factored all public information. So, it not possible to use fundamental analysis to beat the market.

3.Strong form efficiency: Strong efficiency assumes that all information, public and private are reflected in stock prices. So, it is not possible to use insider trading to beat the market.

c.Economic efficiency refers to an economic state where every resource is optimally allocated in a manner which serves every individual and entity in the best way.

Here, goods are produced at the lowest cost possible minimizing waste.

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