DEFINITION of Price Efficiency

Price efficiency is the belief that asset prices reflect the possession of all available information about those assets by all market participants. The theory of price efficiency holds that markets are efficient because of this diffusion of information, and because markets are efficient, it is nearly impossible for investors to earn excess returns or “alpha” on a consistent basis.

BREAKING DOWN Price Efficiency

Price efficiency is a shared article of faith for the adherents of all of the three versions of the efficient market hypothesis (EMH). Each version of this theory assumes that prices — and markets — are efficient. Proponents of the “weak” form of EMH assert that the current prices of publicly-traded securities reflect all available information about them, so their past prices offer no guidance for predicting future price trends. The “semi-strong” version of EMH holds that while prices are efficient, they react instantaneously to new information. Finally, adherents of the “strong” version of EMH maintain that asset prices reflect not just public knowledge, but private insider information as well.