Efficient Capital Markets A review of theory and empirical work

Topics: Expected value, Random walk hypothesis, Efficient-market hypothesis Pages: 103 (13843 words) Published: March 8, 2015
American Finance Association

Efficient Capital Markets: A Review of Theory and Empirical Work Author(s): Eugene F. Fama
Source: The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417

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SESSION TOPIC: STOCK MARKET PRICE BEHAVIOR
SESSION CHAIRMAN: BURTON G. MALKIEL

EFFICIENT CAPITAL MARKETS: A REVIEW OF
THEORY AND EMPIRICAL WORK*
EUGENE

I.

F. FAMA**

INTRODUCTION

THE PRIMARYROLE of the capital market is allocation of ownership of the

economy'scapitalstock.In generalterms,theideal is a marketin whichprices provideaccuratesignalsforresourceallocation: that is, a marketin which decisions,and investorscan choose
firmscan make production-investment
amongthe securitiesthat representownershipof firms'activitiesunderthe assumptionthat securitypricesat any time "fullyreflect"all available inA marketin whichpricesalways"fullyreflect"availableinformaformation. tionis called"efficient."

This paper reviewsthe theoreticaland empiricalliteratureon the efficient marketsmodel.Aftera discussionof the theory,empiricalwork concerned subsets
withthe adjustmentof securitypricesto threerelevantinformation set is just
is considered.First,weak formtests,in whichthe information
formtests,in whichtheconhistoricalprices,are discussed.Then semi-strong thatis obviously
cernis whetherpricesefficiently
adjust to otherinformation
of annual earnings,stocksplits,etc.)
publiclyavailable (e.g., announcements
are considered.Finally,strongformtestsconcernedwithwhethergiveninrelevantfor access to any information
vestorsor groupshave monopolistic
are reviewed.'We shall concludethat,with but a few exprice formation marketsmodelstandsup well.
ceptions,theefficient
Though we proceed fromtheoryto empiricalwork,to keep the proper historicalperspectivewe shouldnoteto a largeextentthe empiricalworkin of thetheory.The theoryis presentedfirst
thisarea precededthedevelopment
here in orderto moreeasily judge whichof the empiricalresultsare most relevantfromtheviewpointof thetheory.The empiricalworkitself,however, willthenbe reviewedin moreor less historicalsequence.
Finally,the perceptivereaderwill surelyrecognizeinstancesin thispaper whererelevantstudiesare not specifically
discussed.In such cases my apolfor
The
is so bountifulthat some such
be
taken
area
granted.
ogies should
the
unavoidable.
But
primarygoal here will have been acinjusticesare
of
main lines of the work on efficient
the
complishedif a coherentpicture
an
marketsis presented,along with accuratepictureof the currentstate of thearts.
* Researchon thisprojectwas supported
by a grantfromtheNationalScienceFoundation.I
am indebtedto ArthurLaffer,RobertAliber,Ray Ball, MichaelJensen,JamesLorie, Merton Miller,CharlesNelson,RichardRoll,WilliamTaylor,and Ross Wattsfortheirhelpfulcomments. ** University
Society.
of Chicago-JointSessionwiththe Econometric
betweenweak and strongformtestswas...


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3. Louis Bachelier. TheIoriede la Speculation (Paris: Gauthier-Villars,1900), and reprintedin
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Research,6 (Autumn, 1968), 159-78.
7. Marshall Blume. "The Assessment of Portfolio Performance." Unpublished Ph.D. thesis,
Universityof Chicago, 1968
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1965), 34-105.
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of Stock Market Behavior." Kyklos, 17 (1964), 1-30.
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18. John R. Hicks. Value and Capital. Oxford: The Clarendon Press, 1946.
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Society,96 (Part I, 1953), 11-25.
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23. Benjamin F. King. "Market and Industry Factors in Stock Price Behavior," Journal of
Business, 39 (Special SupplementJanuary, 1966), 139-90.
24. John Lintner. "Security Prices, Risk, and Maximal Gains from Diversification,"Journal of
Finance, 20 (December, 1965), 587-615.
Portfoliosand Capital Budgets," Review of Economics and Statistics,47 (February, 1965),
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27. Benoit Mandelbrot. "Forecasts of Future Prices, Unbiased Markets, and Martingale Models,"
Journal of Business,39 (Special Supplement,January, 1966), 242-55.
OperationsResearch, 15 (November-December,1967), 1057-62.
30. Harry Markowitz.PortfolioSelection:Efficient
John Wiley & Sons, 1959.
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