Are markets efficient?

Let’s start with an easy one, albeit important one, albeit one that most people, academics included, don’t really understand.   And the answer is:  it depends on the market – but in most cases, for all practical purposes the answer is yes.  But before we can really answer this question, we need to define market efficiency very clearly (and very simply).  Forget what you’ve learned about weak forms and strong forms and the other stuff coming out of academia.

An efficient market is a market where all publicly available information is priced in.    What is public information?  Basically, any information that affects the price of that asset, such as information reported by the company, by its competitors, suppliers and vendors, macroeconomic data, etc.

So which markets are efficient and which less so?  For the most part, the larger and more liquid the market, the more efficient.  Large cap U.S. stocks, U.S. treasuries, currency markets?  All extremely efficient.  Small to mid-cap U.S. stocks?  Still pretty efficient but certainly less so than large caps.   Microcap stocks and emerging market stocks – less efficient still.