Rates v. Prices and Market Efficiency

Rates v. Prices and Market Efficiency

Informational market efficiency is the concept that financial values reflect available information. For example, a financial value is informationally efficient with respect to underlying fundamental information if that fundamental information (e.g., financial statements) cannot be used to generate improved risk-adjusted returns. Prices that are not informationally efficient offer investors the chance to improve their risk-adjusted returns by using the information. However, rates such as inflation rates, interest rates, foreign exchange rates and volatility rates can be predictable even in an efficient market. For example, if a powerful political party with a strong mandate to lower inflation is elected it may be reasonable to predict that there is an increased chance that inflation rates will fall. Just because the rate might be somewhat predictable it does not necessarily follow that the market is inefficient with respect to that rate.

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