Market efficiencyIn simple microeconomics Market efficiency is the impartial estimate of the actual value of the investment. The stock price may be higher or lower than the real value until such deviations are arbitrary. Market efficiency also states that even if the investor has any kind of accurate internal information, he will not be able to beat the market. Fama (1988) defined three levels of market efficiency:1. Weak form efficiencyAsset prices instantly and completely reflect all previous price information. 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 advantage in the market.3. Efficiency in Strong Form Asset prices fully reflect all public and confidential information. Therefore, no one can take advantage of the market in predicting prices because there would be no additional data that would provide any benefit to investors. Stock Market Predictability Stock market forecasting is the method of predicting a company's stock price. The stock price is believed to be driven by the random walk hypothesis. The random walk hypothesis states that the stock market price matures randomly and therefore cannot be predicted. Pesaran (2003) states that it is often argued that if stock markets are efficient then it should not be possible to predict their returns. Indeed, it is easy to observe that stock market returns will be unpredictable only if market efficiency is combined with risk neutrality. On the other hand it was also concluded that using variance ratio tests it is possible to predict long-term stock market returns....... half of the paper ......t Efficiency and predictability of the stock market " [Online] Available at: http://www.emh.org/Pesa03.pdf [Accessed 5 December 2011]. Pontiff, J. and Schal, LD (1998) “Book-to-market ratios as predictors of market return”, Journal of Financial Economics, Vol. 49, No. 2, Pp. 141-160.Rapach, D.E. and Wohar, M.E. (2006) “In-sample and out-of-sample tests of stock return predictability in the context of data mining", Journal of Empirical Finance 13, pp. 231–247. Santa-Clara, P and Ferreira M, A (2010) "Forecasting stock market returns: the sum of the parts is greater than the whole" [ Online] Available at: http ://www.csef.it/6th_C6/SantaClara.pdf [Accessed 6 December 2011]. Wessels, RD (2005) "Stock Market Predictability" [Online] Available at: http://www .indexinvestor.co.za/index_files/MyFiles/StockMarketPredictability.pdf [Accessed December 5, 2011].