Is our market truly efficient?

One of the more commonly debatable concepts in the modern literature is about market efficiency. Market efficiency is where market is expected to be able to absorb new information instantaneously and in an unbiased manner, and fully reflect it in the security’s prices. So the question is, is the market really capable of doing that? If the market really is able to do that, the investors would not be able to make excess returns because the prices of the securities would be expected to reflect its fundamental value.

The fact is, the market is both a mixture of efficiency and inefficiencies. For a market to be truly inefficient, any inefficiency must give rise to an economically exploitable profit making opportunity. The market is constantly flooded with information which is usually picked up by market analysts and reflected in the prices. That said, there are still many small opportunities that exist and are missed. These however are usually are just too expensive to acted upon because of things like taxes, transaction costs and others. So in that sense, the market may not be economically efficient, but is in actual fact efficient and reflecting all available information.

There is a common misconception that the market is inefficient because of the high volatility. Conversely, this actually indicates that the market is efficient because the prices are constantly affected by the information that is being released. If the rate of information arrival is high and this information implies variations in prices, then it is expected that price changes would be frequent and of varying magnitude. Also, the market does not realign automatically and in fact price levels would remain constant until new information arrives at the market.

Simply put, the issue of efficiency is ultimately a matter of degree, rather than extremes. It is in fact the existence of believers in market inefficiencies that keeps the market efficient. This is because those that seek to exploit these inefficiencies would constantly monitor the market, act on them, and eliminate all inefficiencies.

Kind contribution by Ms Mabel Low = )

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