An inefficient market is one where asset prices don’t reflect their true value due to factors like information asymmetry and transaction costs, creating potential for excess profits or losses.
- An inefficient market fails to incorporate all available information into asset prices, leading to potential over- or undervaluations.
- In inefficient markets, savvy investors may achieve excess returns, but others face increased risk.
- Information asymmetries, transaction costs, and market psychology contribute to market inefficiencies.
These inefficiencies challenge the Efficient Market Hypothesis (EMH) and support active investment approaches.