Capital Market Efficiency and Types

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There are three types of market efficiency:
Ø      - when prices are determined in a way that equates the marginal rates of return (adjusted for risk) for all producers and savers, market is said to be allocationally efficient; Ø      - when the cost of transfering funds is “reasonable”, market is said to be operationally efficient; Ø      - when prices fully reflect all available information, market is said to be informationally efficient. Bachelier (1900): In the opening paragraph of his dissertation paper, he recognise that: “past, present and even discounted future events are reflected in market price, but often show no apparent relation to price changes”. Samuelson (1965): In his article, “Proof that properly anticipated prices fluctuate randomly”, he asserted that: “…competitive prices must display price changes…that perform a random walk with no predictable bias.” Therefore, price changes must be unforcastable if they are properly anticipated. Jensen (1978): says that prices reflect information up to the point where the marginal benefits of acting on the information (the expected profits to be made) do not exceed the marginal costs of collecting it. Malkiel (1992): offered the following definition:

“A capital market is said to be efficient if it fully and correctly reflects all relevant information in determining security prices. Formally, the market is said to be efficient with respect to some information set…if security price would be unaffected by revealing that information to all participants. Moreover, efficiency with respect to an informational set …implies that it is impossible to make economic profits by trading on the basis of (that informational set).” Lo and MacKinlay (1999): say: “…the Efficient Markets Hypothesis, by itself, is not a well-defined and empirically refutable hypothesis. To make it operational, one must specify additional structure, e.g., investors’ preferences, information structure, business conditions, etc. But then a...
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