At the beginning of the Market Efficiency reading, it explains Market Efficiency is a market in which asset prices reflect new information quickly and rationally. Thus, asset prices reflect ALL available information. Prices should be expected to react only to elements that are not anticipated fully…
But later on, there are also 3 forms of Market Efficiency (Weak, Semi-Strong, and Strong), so I’m confused as to which types of form is the “Market Efficiency” the book mentions in the beginning? Since asset prices reflect ALL available information, shouldn’t it be Strong Form Market Efficiency?
In other words, when the book refers to “Efficient Market”, are they referring to “Strong Form Market Efficiency”? Probably I am studying this concept from the wrong angle…
I’d go with semi-strong form; i.e., the market generally doesn’t reflect private information.
Ah, I see. So the “Efficient Market” that the book refers to at the beginning of the chapter is one of the “3 Forms of Market Efficiency” mentioned later in the books (which is Semi-Strong). It is an inclusion relationship I guess… Now it makes sense. Thank you！ @S2000magician
The confusion arises when I was doing Reading38 EOC Question#1:
In an efficient market, the change in a company’s share price is most likely the result of:
A. Insiders’ private information
B. the previous day’s change in stock price
C. new information coming into market
So technically, if the market is efficient, it can be weak/semi-strong/strong efficient. So the answer can be both A and C.
Even if the market is strong form efficient, C is more likely than A: public information is more common than private information, and C encompasses both.
My pleasure.