Market efficiencyIn simple microeconomics Market efficiency is the unbiased estimate of the real value of the investment. The stock price may be higher or lower than the actual value until such deviations become arbitrary. Market efficiency also states that even if the investor has accurate inside information, he will not be able to beat the market. Fama (1988) defined three levels of market efficiency: 1. Weak form efficiency Asset prices instantly and completely reflect all information from previous prices. This means that future price changes cannot be predicted using previous prices.2. Semi-strong efficiency Asset prices fully reflect all publicly available data. Therefore, only investors with additional inside information can have an upper hand in the market.3. Strong Form Efficiency Asset prices fully reflect all public and inside information. Therefore, no one can take advantage of the market to predict prices, as there would be no additional data that would provide an advantage to investors. Stock Market Predictability Stock market forecasting is the method of predicting the price of a company's stock. Stock prices are believed to be determined by the assumption of a random walk. The random walk hypothesis states that the stock price moves randomly and therefore cannot be predicted. Pesaran (2003) states that it is often argued that if stock markets are efficient, it should not be possible to predict stock returns. In fact, it is obvious that stock returns will only be unpredictable if market efficiency is combined with risk neutrality. On the other hand, it was also concluded that by using variance ratio tests, long-term stock returns can be predicted....... middle of paper ......t Effectiveness and stock market predictability" [Online] Available at: http://www.emh.org/Pesa03.pdf [Accessed December 5, 2011].Pontiff, J. and Schal, LD (1998) “Book-to-market ratios as Predictors of Market Returns”, Journal of Financial Economics, Vol. 49, No. 2, Pp. 141-160. “In-sample and out-of-sample tests of market predictability. Stock returns in the context of data mining”, Journal of Empirical Finance 13, pp. 231-247. Santa-Clara, P and Ferreira M, A (2010) “Stock returns forecasting: the sum of the parts is more. that the whole » [Online] Available at: http://www.csef.it/6th_C6/SantaClara.pdf [Accessed December 6, 2011]. Wessels, RD (2005) "Stock Market Predictability" [Online] Available at: http://www.indexinvestor.co. za/index_files/MyFiles/StockMarketPredictability.pdf [Accessed December 5, 2011].