Price efficiency definition
/What is Price Efficiency?
Price efficiency is the concept that the price at which an asset sells should already reflect all public supply and demand information pertaining to it. A variation on the concept states that changes in this information are reflected instantly in the market price, while yet another version states that the price already reflects information that is both publicly and privately available. The concept implies that it should not be possible for an investor to consistently earn excess returns.
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Limitations of Price Efficiency
Realistically, buyers and sellers may agree to prices that are different from what perfect information about an asset would state that the price should be, which suggests that price efficiency is an imperfect concept. Thus, it seems likely that price efficiency can be skewed by the relative need of the parties to a transaction to buy or sell an asset, or their perceptions of the value of the asset. Here are several examples:
Seller requirements. The seller may be desperate for cash, and so will pay a price lower than the market would indicate is reasonable.
Purchaser requirements. The buyer may be desperate to obtain the asset, which is most likely when the buyer has an extremely optimistic view of the future prospects of the asset. This situation also arises for collectibles, where the buyer has a deep personal interest in owning the asset.
Relative perceptions of quality. Another factor impacting price efficiency is the perceived qualitative condition of the asset. A seller typically thinks an asset is in better condition than does the buyer, so the seller wants a higher price than the buyer is willing to pay.
Given these variations on the concept, price efficiency should be considered more of a theoretical than an entirely realistic concept.