Market E¢ ciency Today - A Market Perspective

Economists have long been fascinated by the sources of variations in the stock market. By the early 1970’s a consensus had emerged among …nancial economists suggesting that stock prices could be well approximated by a random walk model and that changes in stock returns were basically unpredictable. Fama (1970) provides an early, de…nitive statement of this position. Historically, the ‘random walk’theory of stock prices was preceded by theories relating movements in the …nancial markets to the business cycle. A prominent example is the interest shown by Keynes in the variation in stock returns over the business cycle. The e¢ cient market hypothesis (EMH) evolved in the 1960’s from the random walk theory of asset prices advanced by Paul Samuelson (1965). Samuelson showed that in an informationally e¢ cient market price changes must be unforecastable. Kendall (1953), Cowles (1960), Osborne (1959, 1962), and many others had already provided statistical evidence on the random nature of equity price changes. Samuelson’s contribution was, however, instrumental in providing academic respectability for the hypothesis, despite the fact that the random walk model had been around for many years. In fact, as