Journal of Finance2014-09-28 4:40 PM


The primary role of the capital market is allocation of ownership of the economy's capital stock. In general terms, the ideal is a market in which prices provide accurate signals for resource allocation: that is, a market in which firms can make production-investment decisions, and investors can choose among the securities that represent ownership of firms's activities under the assumption that security prices at any time “fully reflect” all available information. A market in which prices always “fully reflect” available information is called “efficient.”

This paper reviews the theoretical and empirical literature on the efficient markets model. After a discussion of the theory, empirical work concerned with the adjustment of security prices to three relevant information subsets is considered. First, weak form tests, in which the information set is just historical prices, are discussed. Then semi-strong form tests, in which the concern is whether prices efficiently adjust to other information that is obviously publicly available (e.g., announcements of annual earnings, stock splits, etc.) are considered. Finally, strong form tests concerned with whether given investors or groups have monopolistic access to any information relevant for price formation are reviewed.1 We shall conclude that, with but a few exceptions, the efficient markets model stands up well.

Though we proceed from theory to empirical work, to keep the proper historical perspective we should note to a large extent the empirical work in this area preceded the development of the theory. The theory is presented first here in order to more easily judge which of the empirical results are most relevant from the viewpoint of the theory. The empirical work itself, however, will then be reviewed in more or less historical sequence.

Finally, the perceptive reader will surely recognize instances in this paper where relevant studies are not specifically discussed. In such cases my apologies should be taken for granted. The area is so bountiful that some such injustices are unavoidable. But the primary goal here will have been accomplished if a coherent picture of the main lines of the work on efficient markets is presented, along with an accurate picture of the current state of the arts.

Full Article





Journal of Finance

The Journal of Finance publishes leading research across all the major fields of financial research. It is the most widely cited academic journal on finance.

0 Following 12 Fans 0 Projects 72 Articles


AbstractWe study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund per

Read More

Abstract:During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed

Read More

Abstract:We propose a new definition of skill as general cognitive ability to pick stocks or time the market. We find evidence for stock picking in b

Read More

Abstract:We investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developm

Read More

Abstract:We establish that CEOs of companies experiencing volatile industry conditions are more likely to be dismissed. At the same time, accounting

Read More

Abstract:Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and

Read More

Abstract:Contrary to recent accounts of off-balance-sheet securitization by financial firms, we show that asset securitization by nonfinancial firms

Read More

Abstract:To rationalize the well-known underperformance of the average actively managed mutual fund, we exploit the fact that retail funds in differe

Read More

 The process of selecting a portfolio may be divided into two stages. The first stage starts with observation and experience and ends with beliefs abou

Read More

AbstractOne of the problems which has plagued those attempting to predict the behavior of capital markets is the absence of a body of positive microeco

Read More