Published Jan 4, 2023 Informationally efficient markets are markets in which prices reflect all available information about the underlying asset (e.g., a company’s stock). That means that all relevant information is quickly and accurately incorporated into the price of the asset. As a result, prices in informationally efficient markets are considered to be the most accurate reflection of the true value of the asset. This term was first introduced by Nobel Price winning economist Eugene F. Fama, who used it to expand his previously developed efficient market hypothesis. To illustrate this, let’s look at the stock market. The stock market is considered to come fairly close to an informationally efficient market (i.e., arguably as close to it as we’ll ever get in reality). That means, according to proponents of Fama’s hypotheses, the prices of stocks reflect all available information about the underlying companies, such as their current and projected future financial performance, management decisions, and industry trends. As a result, the prices of stocks are considered to be the most accurate reflection of the true value of the company. The concept of informationally efficient markets is helpful to understand how markets work and why it’s very difficult for investors to “beat the market”. In addition to that, markets that come close to being informational efficient ensure that prices accurately reflect the true value of the underlying asset. This is important because it allows investors to make informed decisions about their investments. In addition to that, accurate valuations also help to ensure that the market is fair and efficient, as prices are not artificially inflated or deflated due to a lack of information. Finally, efficient markets also help to reduce the risk of fraud and manipulation, as all relevant information is quickly and accurately incorporated into the price of the asset.Definition of Informationally Efficient
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Why Informationally Efficient Matters
Financial Economics