Efficient Capital Markets: A Review of Theory and Empirical Work
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What they found
Fama organized decades of scattered evidence into one framework and defined three flavors of market efficiency: weak (past prices tell you nothing), semi-strong (public information is already priced), and strong (even private information is priced). He reviewed the random-walk tests, event studies on splits and earnings, and mutual fund performance, and concluded the evidence for weak and semi-strong efficiency was strong, with only limited exceptions for insiders and specialists. The paper became the reference point that every later anomaly study argues against.
What you can use
- The burden of proof is on the trader: a strategy must beat a passive benchmark after costs, not just make money.
- Weak-form efficiency is the claim that chart-based signals should not work; the later momentum and technical-analysis literature is the direct test of it.
- Event studies showed prices adjust to public news within days or faster, so trading old headlines is usually too late.
- Efficiency is a statement about the average market participant, not a promise that every price is right.
Caveats
Written before most modern anomalies (size, value, momentum) were documented, using data through the late 1960s. Fama himself later revised the taxonomy and acknowledged the joint-hypothesis problem: any test of efficiency is also a test of the pricing model used.
Tags: efficiency, theory, foundations, survey
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.