In economic theory, there is a concept of market efficiency; the Efficient Market Hypothesis (EMH) is one of the basic ideas of finance theory. There are three forms of market efficiency: weak, strong and semi-strong. The criterion of efficiency is determined by the access of its participants to information. The completeness of the information regarding the asset price is a crucial factor in ENH, thus it is important to analyze three forms of market efficiency.
-Weak Form Efficient: The weak form of market efficiency occurs if the value of an asset fully reflects the related information. Therefore, if the state of the market corresponds to such form, the analysis of past information becomes unnecessary since it has already been reflected in the price. Past information is primarily data analyzed in the framework of technical analysis. An analyst with data on market prices can identify trends and predict their behavior in the future.
-Semi-Strong Form: The semi-strong form of efficiency assumes that the price of an asset reflects not only past but also public information. Such a form allows businesses to get access to profits through the use of public information, including data from fundamental analysis. Since all market participants receive publicly available information, none of them will receive additional income through fundamental analysis.
-Strong Form: A strong form efficiency appears when the price of an asset reflects all information: past, public and private. With a strong form of market efficiency, it is impossible to obtain benefits using inside information since it has been taken into account in the price of financial asset. Note, this form of market efficiency does not exist in real life since the legislation contains specific barriers that prevent private information from getting into the public domain.
In conclusion, if the market is efficient, then all investors are in equal competitive conditions in relation to each other. As significant change in the price of an asset can only be caused by the appearance of any new information that could be predicted with a sufficient degree of reliability in advance.
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