Definition of Pricing efficiency

Pricing efficiency

Also called external efficiency, a market characteristic where prices at all times fully
reflect all available information that is relevant to the valuation of securities.

External efficiency

Related: pricing efficiency.

Semi-strong form efficiency

A form of pricing efficiency where the price of the security fully reflects all
public information (including, but not limited to, historical price and trading patterns). Compare weak form
efficiency and strong form efficiency.

Strong-form efficiency

pricing efficiency, where the price of a, security reflects all information, whether or
not it is publicly available. Related: Weak form efficiency, semi strong form efficiency

Weak form efficiency

A form of pricing efficiency where the price of the security reflects the past price and
trading history of the security. In such a market, security prices follow a random walk. Related: Semistrong
form efficiency, strong form efficiency.

Administrative pricing rules

IRS rules used to allocate income on export sales to a foreign sales corporation.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Arbitrage Pricing Theory (APT)

An alternative model to the capital asset pricing model developed by
Stephen Ross and based purely on arbitrage arguments.

Asset pricing model

A model for determining the required rate of return on an asset.

Asset pricing model

A model, such as the Capital Asset pricing Model (CAPM), that determines the required
rate of return on a particular asset.

Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

Capital Asset Pricing Model (CAPM)

A model for estimating equilibrium rates of return and values of
assets in financial markets; uses beta as a measure of asset risk
relative to market risk

capital asset pricing model (CAPM)

Theory of the relationship between risk and return which states that the expected risk
premium on any security equals its beta times the market risk premium.

Capital market efficiency

Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.

Cost-plus pricing

A method of pricing in which a mark-up is added to the total product/service cost.

dual pricing arrangement

a transfer pricing system that allows
a selling division to record the transfer of goods or
services at one price (e.g., a market or negotiated market
price) and a buying division to record the transfer at another
price (e.g., a cost-based amount)

Efficiency

Reflects the amount of wasted energy.

efficiency

a measure of the degree to which tasks were performed
to produce the best yield at the lowest cost from
the resources available; the degree to which a satisfactory
relationship of outputs to inputs occurs

Efficiency

The ability to produce the things most wanted at the least cost.

Efficiency Wage

Wage that maximizes profits.

Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

Informational efficiency

The speed and accuracy with which prices reflect new information.

labor efficiency variance

the number of hours actually worked minus the standard hours allowed for the production
achieved multiplied by the standard rate to establish
a value for efficiency (favorable) or inefficiency (unfavorable)
of the work force

Labor efficiency variance

The difference between the amount of time that was budgeted
to be used by the direct labor staff and the amount actually used, multiplied
by the standard labor rate per hour.

manufacturing cycle efficiency (MCE)

a ratio resulting from dividing the actual production time by total lead time;
reflects the proportion of lead time that is value-added

Market Efficiency

See efficiency.

Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace
information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active
management of earning a greater return than passive management would, after adjusting for the risk
associated with a strategy and the transactions costs associated with implementing a strategy.

overhead efficiency variance

the difference between total budgeted overhead at actual hours and total budgeted
overhead at standard hours allowed for the production
achieved; it is computed as part of a three-variance analysis;
it is the same as variable overhead efficiency variance

Regulatory pricing risk

Risk that arises when regulators restrict the premium rates that insurance companies
can charge.

semi-strong-form efficiency

Market prices reflect all publicly available information.

strong-form efficiency

Market prices rapidly reflect all information that could in principle be used to determine true value.

Target rate of return pricing

A method of pricing that estimates the desired return on investment to be achieved from the
fixed and working capital investment and includes that return in the price of a product/service.

Two-state option pricing model

An option pricing model in which the underlying asset can take on only two
possible (discrete) values in the next time period for each value it can take on in the preceding time period.
Also called the binomial option pricing model.

Underpricing

Issue of securities below their market value.

underpricing

Issuing securities at an offering price set below the true value of the security.

variable overhead efficiency variance

the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

weak-form efficiency

Market prices rapidly reflect all information contained in the history of past prices.

Yield curve option-pricing models

Models that can incorporate different volatility assumptions along the
yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.

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