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Efficient Market Hypothesis

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This is a large part of the theoretical argument for passive management and against persistence of mutual fund returns.  The developed world's equity and bond markets are quite efficient.  This means that there are many intelligent rational people trying to maximize their wealth and that relevant information about securities travels extremely quickly.  In other words, everybody else already knows everything you think you know about a particular security and they have already taken advantage of that information (and eliminated any opportunity that may have briefly existed to take advantage of that information) before you get a chance to.

"THE INFLUENCES  which determine  fluctuations on the Exchange are innumerable; past, present, and even discounted future events are [all] reflected in market price ... At a given instant, the market believes in neither a rise nor a fall of true prices." — Louis Bachelier, Theory of Speculation, 1900

Eugene F. Fama, "Random Walks in Stock Market Prices," Chicago School of Business Selected Paper Series, Paper #16 (102kb).  Also available here (102kb).  This paper also appeared in Financial Analysts Journal, September/October 1965, pp. 55-59.  Reprinted in Financial Analysts Journal, January/February 1995, pp. 75-80. This paper is a non-technical version of Dr. Fama's doctoral dissertation below.  This is the seminal paper where Dr. Fama coined the term "Efficient Market."  "In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value."

Eugene F. Fama, "The Behavior of Stock Market Prices," Journal of Business, January 1965, pp. 34-105 (8.52mb). This paper is the technical version of Dr. Fama's doctoral dissertation summarized above.

Ray Ball, "The Development, Accomplishments and Limitations of the Theory of Stock Market Efficiency," Managerial Finance, 20 (2,3) 1994, pp. 3-48. A good summary of the research into stock market efficiency.  See here for an excellent discussion of this paper.

Burton G. Malkiel, "The Efficient Market Hypothesis and its Critics", Journal of Economic Perspectives, 2003 17(1), pp. 59-82 (523kb). "This survey examines the attacks on the efficient-market hypothesis and the relationship between predictability and efficiency.  I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe."

Burton G. Malkiel, "Reflections on the Efficient Markets Hypothesis: 30 Years Later", The Financial Review, February 2005, pp. 1-9 (401kb). "The evidence is overwhelming that active equity management is, in the words of Ellis (1998), a 'loser’s game.' Switching from security to security accomplishes nothing but to increase transactions costs and harm performance. Thus, even if markets are less than fully efficient, indexing is likely to produce higher rates of return than active portfolio management. Both individual and institutional investors will be well served to employ indexing ..."


"Is That a $100 Bill Lying on the Ground?  Two Views of Market Efficiency," Wharton School of Business, 2002. Highlights of a debate between two influential academics, Burton Malkiel and Richard Thaler.  You may need to register (for free) in order to view this.

Martin Sewell, "Efficient Markets Hypothesis Bibliography,"  University College London. An excellent bibliography of this topic

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Efficient Market Hypothesis

This is a large part of the theoretical argument for passive management and against persistence of mutual fund returns.  The developed world's equity and bond markets are quite efficient.  This means that there are many intelligent rational people trying to maximize their wealth and that relevant information about securities travels extremely quickly.  In other words, everybody else already knows everything you think you know about a particular security and they have already taken advantage of that information (and eliminated any opportunity that may have briefly existed to take advantage of that information) before you get a chance to.

"THE INFLUENCES  which determine  fluctuations on the Exchange are innumerable; past, present, and even discounted future events are [all] reflected in market price ... At a given instant, the market believes in neither a rise nor a fall of true prices." — Louis Bachelier, Theory of Speculation, 1900

Eugene F. Fama, "Random Walks in Stock Market Prices," Chicago School of Business Selected Paper Series, Paper #16 (102kb).  Also available here (102kb).  This paper also appeared in Financial Analysts Journal, September/October 1965, pp. 55-59.  Reprinted in Financial Analysts Journal, January/February 1995, pp. 75-80. This paper is a non-technical version of Dr. Fama's doctoral dissertation below.  This is the seminal paper where Dr. Fama coined the term "Efficient Market."  "In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value."

Eugene F. Fama, "The Behavior of Stock Market Prices," Journal of Business, January 1965, pp. 34-105 (8.52mb). This paper is the technical version of Dr. Fama's doctoral dissertation summarized above.

Ray Ball, "The Development, Accomplishments and Limitations of the Theory of Stock Market Efficiency," Managerial Finance, 20 (2,3) 1994, pp. 3-48. A good summary of the research into stock market efficiency.  See here for an excellent discussion of this paper.


















Burton G. Malkiel, "The Efficient Market Hypothesis and its Critics", Journal of Economic Perspectives, 2003 17(1), pp. 59-82 (523kb). "This survey examines the attacks on the efficient-market hypothesis and the relationship between predictability and efficiency.  I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe."


Burton G. Malkiel, "Reflections on the Efficient Markets Hypothesis: 30 Years Later", The Financial Review, February 2005, pp. 1-9 (401kb). "The evidence is overwhelming that active equity management is, in the words of Ellis (1998), a 'loser’s game.' Switching from security to security accomplishes nothing but to increase transactions costs and harm performance. Thus, even if markets are less than fully efficient, indexing is likely to produce higher rates of return than active portfolio management. Both individual and institutional investors will be well served to employ indexing ..."


"Is That a $100 Bill Lying on the Ground?  Two Views of Market Efficiency," Wharton School of Business, 2002. Highlights of a debate between two influential academics, Burton Malkiel and Richard Thaler.  You may need to register (for free) in order to view this.



Martin Sewell, "Efficient Markets Hypothesis Bibliography,"  University College London. An excellent bibliography of this topic.