Market Efficiency

How quickly and how fully prices absorb information: what an efficient market is, the gap between market value and intrinsic value, the factors that make a market more or less efficient, Fama's weak, semi-strong and strong forms and what each means for technical analysis, fundamental analysis and the active-versus-passive choice, the best-known market anomalies and why most fade, and how behavioural finance tries to explain them.

1. 1. What an efficient market isIn an informationally efficient market, prices absorb new information quickly and rationally, so market value sits at or near intrinsic value and nobody can earn superior risk-adjusted returns, after all costs, on a consistent basis.Free14 min
2. 2. What makes a market more or less efficientA market is more efficient the more participants and analysts follow it, the better and fairer its information flow, the fewer the limits on trading (including short selling), and its efficiency is always judged net of transaction and information-acquisition costs.14 min
3. 3. Weak, semi-strong and strong formsFama's three forms differ only in the information prices are assumed to reflect: past market data (weak), all public information (semi-strong) or all public and private information (strong); each form contains the ones below it, and the evidence for developed markets supports the first two but not the third.Video · 6 min15 min
4. 4. Implications for analysis and portfolio managementIf developed markets are weak-form and semi-strong-form efficient, technical analysis cannot earn consistent abnormal returns, fundamental analysis pays only with a genuine comparative advantage, passive management should beat active management after costs, and the portfolio manager's job becomes building the right portfolio rather than beating the market.13 min
5. 5. Market anomalies I: calendar, momentum, size and valueA market anomaly is a price change that cannot be linked to relevant information; to count it must persist over long periods, and the best-known time-series and cross-sectional anomalies have mostly faded, been explained by risk or turned out to be products of data mining.Video · 5 min15 min
6. 6. Market anomalies II: other anomalies and what they meanClosed-end fund discounts, earnings-surprise drift, IPO underpricing and return predictability all look like inefficiencies, but costs, risk, methodology and instability make them very hard to turn into profits, so most researchers see them as statistical artefacts rather than violations of efficiency.14 min
7. 7. Behavioural finance and market efficiencyBehavioural finance uses investors' biases (loss aversion, herding, overconfidence, information cascades and others) to explain some anomalies, but markets can still be efficient as long as the market as a whole is rational and nobody can consistently beat it on a risk-adjusted basis.14 min