Efficient Capital Markets: II

Eugene Fama

Research

43 Pages

This paper revisits market efficiency, examining how decades of empirical research changed what investors know about return behavior. Fama finds that predictability grows at longer horizons, but argues that separating market inefficiency from rational changes in expected returns remains an unresolved challenge.

Key Takeaways

Long Horizon Predictability: Predictable components account for as much as 40% of the variance in returns measured over 2 to 10 years.
January Effect Fades: Small stocks averaged 8.06% January returns from 1941 to 1981, versus 1.34% for the S&P 500.
Market Weight Matters: The smallest stock quintile represented 51.2% of listed stocks in 1990 but only 1.5% of total market value.
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