Tuesday, 2 May 2017

Efficient Market versus Inefficient Market

An information efficient market (an efficient market) is one where security prices adjust rapidly to reflect any new information.

It is a market where asset prices reflect all past and present information.

Investment managers and analysts are interested in market efficiency because it dictates how many profitable trading opportunities may abound in the market.

Efficient market

In an efficient market, it is difficult to find inaccurately priced securities.  

Therefore, superior risk-adjusted returns cannot be attained in an efficient market.

It would be wise to pursue a passive investment strategy which entails lower costs.

In an efficient market, the time frame required for security prices to reflect any new information is very short.   

Further, prices only adjust to new or unexpected information (surprises).

Inefficient market

In an inefficient market, securities may be mispriced.

Trading in these securities can offer positive risk-adjusted returns. 

In such a market, an active investment strategy may outperform a passive strategy on a risk-adjusted basis.

No comments: