Investors do not like risk and should be compensated for taking risks. The greater the risk in the market, the greater the compensation, so an important question about financial markets is that it affects the different strategies that investors can pursue. Can investors earn a return on a financial asset that is greater than necessary to compensate for the risk? Economists refer to this excess compensation as abnormal returns. Can this be done in a particular financial market? This is an empirical question. If there is a strategy that produces extraordinary returns, the attributes that motivate the implementation of such a strategy are known as market anomalies.

Market efficiency must refer to how efficiently a financial market prices the assets traded in that market. A price efficient market or simply an efficient market is a financial market where asset prices reflect all available information rapidly. This means that all available information is already captured in the price of the asset, so investors should expect to earn the return necessary to compensate for their expected risk. This will avoid abnormal returns. But according to Eugene Fame there are following three levels of market efficiency.

Weak-form efficient

Semi strong efficient

Strong-form efficient

In a weak form of market efficiency, current asset prices reflect all past prices and price movements. In other words, all the useful information about a stock's historical prices is already reflected in today's price. An investor cannot use the same information to predict tomorrow's price, yet not make extraordinary profits.

In the semi-strong form of market efficiency current asset prices reflect all publicly available information. The implication is that investors cannot make abnormal profits if they use investment strategies based on the use of publicly available information. This does not mean that prices change immediately to reflect new information, but rather that asset prices reflect this information rapidly. Empirical evidence supports the idea that the stock market is semi-firmly efficient for the most part. This means that careful analysis of companies issuing stocks does not consistently yield abnormal returns.

In the robust form of market efficiency asset prices reflect all public and private information. That is, the market knows everything about all financial assets that information has not been made public. The robust nature means that investors cannot make abnormal returns from trading on inside information that has not yet been made public. This type of market efficiency in the stock market is not supported by empirical studies. Profit from trading on inside information. Stock market thus suggests empirical evidence. Essentially semi strong is functional but not in strong form.

A market efficiency implication for issuers is that if the financial markets in which they issue securities are quasi-firmly efficient, issuers should expect investors to pay prices for shares that reflect their value. This means that if new information about the issuer is revealed to the public, the price of the security must change to reflect that new information.

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