Market Efficiency
The degree to which asset prices fully and immediately reflect all available information.
What is Market Efficiency?
Market efficiency describes how quickly and accurately the prices of financial assets incorporate all available information. The Efficient Market Hypothesis (EMH), developed by economist Eugene Fama, proposes three forms of market efficiency. The weak form states that current prices already reflect all historical trading data, making technical analysis ineffective for generating excess returns. The semi-strong form states that prices reflect all publicly available information—including earnings announcements and news—making fundamental analysis unable to consistently beat the market. The strong form states that prices reflect even private (insider) information, leaving no edge for any investor. Most academic evidence supports the semi-strong form for developed markets, though anomalies (such as momentum and value effects) suggest markets are not perfectly efficient. Market efficiency has major implications for active vs. passive investing strategies.
Example
When the Federal Reserve unexpectedly raises interest rates by 50 basis points, equity and bond markets typically reprice within seconds of the announcement—adjusting to the new interest rate environment before most investors can react. This rapid adjustment is consistent with the semi-strong form of the Efficient Market Hypothesis, where public information is quickly incorporated into prices.
Source: Fama, E.F. (1970) — Efficient Capital Markets: A Review of Theory and Empirical Work