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Efficient Capital Markets A review of theory and empirical work

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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 Published by: Wiley for the American Finance Association Stable URL: http://www.jstor.org/stable/2325486 . Accessed: 02/08/2014 05:59 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range …show more content…

THE THEORY OF EFFICIENT MARKETS A. ExpectedReturnor "Fair Game" Models marketprices"fullyreflect" thatin an efficient The definitional statement testableimplicais so generalthatit has no empirically availableinformation mustbe tions.To make the modeltestable,the processof price formation specifiedin moredetail. In essencewe mustdefinesomewhatmore exactly whatis meantby the term"fullyreflect." One possibilitywouldbe to posit that equilibriumprices (or expectedreturns) on securitiesare generatedas in the "two parameter"Sharpe [40]Lintner[24, 25] world.In general,however,the theoreticalmodelsand eshave not been this peciallythe empiricaltests of capital marketefficiency specific.Most of the availableworkis based onlyon the assumptionthatthe conditionsof marketequilibriumcan (somehow)be statedin termsof expectedreturns.In generalterms,like the two parametermodelsuch theories set,the equilibrium wouldpositthatconditionalon somerelevantinformation theories of its "risk."And different expectedreturnon a securityis a function in how "risk"is defined. primarily woulddiffer All membersof the class of such "expectedreturntheories"can, however, be describednotationally as follows: E(gj,t+,I|@t) =[I + E(r-,t+1|0t) ]pjtl 1 whereE is theexpectedvalue operator;pit is thepriceof securityj at timet; cash income of any intermediate pj,t+iis its priceat t + 1 (withreinvestment fromthe security); ri,t+iis the one-periodpercentagereturn(pi,t+l- pjt)/ is assumedto be

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