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Inefficient Market

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An inefficient market is one in which assets are underpriced or overpriced by market participants. According to the efficient market hypothesis (EMH), the difference between an inefficient market and an efficient one comes down to whether participants are rational investors having good information readily available. The less quality information and the slower it is spread, the more of an inefficient market exists. Abrupt drops during panics are evidence that the equity market is an inefficient market. That investors violate the rationality assumption underpinning the efficiency logic at these key times suggests an inefficient market. Contemporary behavioral finance asserts that the inefficient market is a product of these market psychology phenomena, but the inefficient market is still defined by comparison to the hypothetical efficient one.

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