Reflections on theories of market efficiency

Abstract

Market efficiency is determined by how efficiently markets capture the information. Efficient markets can capture and incorporate all the available information into stock prices within no time. It means market prices traded are the actual prices of shares. There have been many theories trying to debate about how to determine market efficiency. If markets are efficient, there is no scope for investors to earn abnormal returns on the investments. In that case, investments in markets would not provide any additional returns. There have been many debates and theories on the topic of market efficiency. Postmodern portfolio theory (PMPT) came into existence after almost 40 years of the modern theory of portfolio given by Henry Markowitz. Both the theories give a risk–return framework for decision making and there are many conflicting aspects of market efficiency. I try to address this issue in this paper that raises concerns for the investor as to which markets are called efficient and what contributes to market efficiency, as denoted in modern portfolio theory (MPT) and post modern portfolio theory (PMPT).

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