Efficient Market Theory

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table5"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table6"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table7"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Efficient Market Hypothesis</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table8"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="98%" align="left" valign="top"><p class="word_list"> <a href="#efficient">efficient market</a><p class="word_list"> <a href="#efficient_market_hypothesis">efficient market hypothesis</a><p class="word_list"> <a href="#Eugene_Famas">Fama, Eugene</a><p class="word_list"> <a href="#semi-strong_efficiency">semi-strong efficiency</a><p class="word_list"> <a href="#strong_efficiency">strong efficiency</a><p class="word_list"> <a href="#weak_efficiency">weak efficiency</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <p class="body">The <b><a name="efficient_market_hypothesis">efficient market hypothesis</a></b>—like the <a href="../articles/random_walk_hypothesis.htm">random walk hypothesis</a> it grew out of—is not so much a hypothesis as it is a model for how markets perform. As a model, it applies to some markets more than others. A market is said to be <b> <a name="efficient">efficient</a></b> if prices in that market reflect all available information. </p> <p class="body">Suppose you hear that a firm has just announced quarterly earnings that exceed analysts' predictions. You rush to buy the <a href="../articles/common_stock.htm">stock</a> but find its price has already risen two dollars from the previous day's close. Are you too late? Might the price continue to rise on the positive news, or has the market overreacted? Perhaps you should <a href="../articles/short_sale.htm">sell short</a> instead of buying? The efficient market hypothesis says these questions are mute—that whatever information you consider in making a decision has already been incorporated into prices and is useless for predicting future prices of the stock. Market efficiency renders speculative trading pointless. We will elaborate on this shortly, but let's first consider some background.</p> <p class="body">The random walk hypothesis of the early 1960s was an empirical result. Based on <a href="../articles/time_series_stochastic_process.htm">time-series analyses</a> of price series, researchers concluded that the price series behaved like <a href="../articles/random_walk.htm">geometric random walks</a>. This threw cold water on the practice of technical analysis, suggesting the predictive price patterns technicians divined from price charts were only figments of their imagination. However, the absence of predictive price patterns does not mean that prices cannot be predicted using other information. It ruled out technical analysis but not fundamental analysis.</p> <p class="body">Some of the literature supporting the random walk hypothesis—especially <a href="../articles/random_walk_hypothesis.htm">Alfred Cowles'</a> work—did seem to discredit fundamental analysis as well. Rather than study time series of prices, Cowles studied the performance of investment managers and investment newsletters. Presumably, these employed a variety of analytic techniques to make stock picks. Their collective poor performance cast doubt, not only on technical analysis, but on all means of speculative trading. In the late 1960s and early 1970s, <b><a name="Eugene_Famas">Eugene Fama's</a></b> efficient market hypothesis extended the random walk hypothesis to throw cold water on all forms of analysis employed by speculative traders.</p> <p class="body">Fama had helped pay his way through college by working for professor Harry Ernst, who published a newsletter recommending stock picks based on technical analysis. He gave Fama the job of studying past prices to identify profitable trading systems. Identifying systems that performed well on the historical data was easy, but they routinely failed when implemented. Fama was learning for himself what is widely know to professional investors—that data mining can produce all sorts of trading systems that work beautifully on the data from which they are derived but are worthless otherwise.</p> <p class="body">Fama took these experiences with him to the University of Chicago, where he earned a PhD in finance. His thesis was published in the <i>Journal of Business</i> in <a href="#Fama_65a">1965</a> as the "Behavior of Stock Market Prices." This elaborated on the random walk hypothesis, fleshing out other researchers' justification for why prices should follow a random walk. It reported on Fama's own empirical studies of past price data. Advances in computers had made it possible for him to perform more elaborate studies than earlier researchers. Fama also looked at flaws in the random walk hypothesis, focusing especially on the issue of market <a href="../articles/kurtosis.htm">leptokurtosis</a>. His overall conclusions were dismal for market technicians. The random walk hypothesis was an excellent model for the markets, and whatever flaws it might have, they weren't anything that would present market technicians with trading opportunities. </p> <p class="body">Although Fama's paper was about the random walk hypothesis, it is notable for introducing the term "efficient market" and anticipating the efficient market hypothesis: <sup><font size="2"><a href="#footnote_[1]" name="[1]">[1]</a></font></sup></p> <p class="quote">... a situation where successive price changes are independent is <i>consistent with</i> the existence of an "efficient" market for securities, that is, a market where, given the available information, actual prices at every point in time represent very good estimates of intrinsic values ...</p> <p class="body">In an abbreviated version of his paper, which Fama (<a href="#Fama_65b">1965</a>) wrote for the practitioner-oriented <i>Financial Analysts Journal</i>, he elaborated:<sup><font size="2"> <a href="#footnote_[2]" name="[2]">[2]</a></font></sup></p> <p class="quote">An "efficient" market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants ... <i>on the average</i>, competition will cause the full effects of new information on intrinsic values to be reflected "instantaneously" in actual prices.</p> <p class="body">But he still held out hope for fundamental analysts: <sup><font size="2"><a href="#footnote_[3]" name="[3]">[3]</a></font></sup></p> <p class="quote">... the existence of many sophisticated analysts helps make the market more efficient which in turn implies a market which conforms more closely to the random walk model. Although the returns to these sophisticated analysts may be quite high, they establish a market in which fundamental analysis is a fairly useless procedure both for the average analyst and the average investor.</p> <p class="body">This was just so much theory, unsupported by empirical facts. Fama's empirical work had exclusively looked at time series of prices, and a study of fundamental analysis would likely need to look at investment managers' performance or study stock price movements following announcements, such as stock splits or earnings announcements. In 1965, the scant research along such lines—Cowles (<a href="#Cowles">1933</a>), Friend et al (<a href="#Friend">1962</a>) and Horowitz (<a href="#Horowitz">1963</a>) studied investment managers' performance—had found no evidence of sophisticated analysts earning "quite high" returns.</p> <p class="body">Between 1965 and 1970, many empirical studies were performed on stock price behavior or investment managers' performance. These culminated in <a href="#Fama_1970">1970</a> with Fama's second landmark paper, which appeared in the <i>Journal of Finance</i> and was titled "Efficient capital markets: A review of theory and empirical work." In it, Fama elaborated on his theory of efficient markets and reviewed the developing literature. Based on the terminology of his colleague Harry Roberts, he reported on empirical tests for three different levels of market efficiency:</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10">A market has <b><a name="weak_efficiency">weak efficiency</a></b> if prices fully reflect any information contained in past price data. Weak efficiency rejects technical analysis. It is essentially the random walk hypothesis but without as full a characterization of the <a href="../articles/time_series_stochastic_process.htm">stochastic process</a> that describes price behavior.</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10">A market has <b><a name="semi-strong_efficiency">semi-strong efficiency</a></b> if prices fully reflect all readily-available public information—past prices, economic news, earnings reports, etc. Tests of semi-strong efficiency are those that study stock price movements following announcements, such as stock splits or earnings announcements.</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10">A market has <b><a name="strong_efficiency">strong efficiency</a></b> if prices fully reflect all public and privileged information. Privileged information includes knowledge available to a market maker, insider information available to corporate managers, or information that investment managers invest time and effort to compile for their own use. </p> <p class="body">Fama's 1965 paper had explored the random walk hypothesis, and there was nothing unexpected to report in 1970. Empirical studies of the random walk hypothesis strongly supported weak market efficiency.</p> <p class="body">Empirical studies of semi-strong or strong market efficiency had been made possible by the new <a href="../articles/capital_asset_pricing_model.htm">capital asset pricing model</a> of Sharpe (<a href="#Sharpe">1964)</a> and Lintner (<a href="#Lintner">1965</a>). For semi-strong efficiency, this allowed researchers to disaggregate individual security's returns into a component due to broad market moves and a "residual" component specific to each security. Semi-strong efficiency was tested by assessing the behavior of those residuals leading up to and following announcements. Fama, Fisher, Jensen and Roll (<a href="#Fama_et_al_1969">1969</a>) performed such a study around announced stock splits. Ball and Brown (<a href="#Ball">1968</a>) did so with quarterly earnings announcements. Scholes (1969) considered new stock issuances as well as large underwritten sales of existing common stock. All these studies gave strong support for semi-strong market efficiency.</p> <p class="body">Fama acknowledged that strong market efficiency could not be a realistic model for the markets, since certain non-public information clearly presented a profit opportunity for those who possessed it. Market makers on the New York Stock Exchange made consistent profits trading stocks due to the privileged information their positions afforded them. Corporate managers could also profit from trading based on inside information their positions made available to them (although the practice was and still is illegal in the United States). For Fama, the question was not whether the markets were strongly efficient. It was: how strongly efficient are they? <sup> <font size="2"><a href="#footnote_[4]" name="[4]">[4]</a></font></sup></p> <p class="quote">Since we already have enough evidence to determine that the model is not strictly valid, we can now turn to other interesting questions. Specifically, how far down through the investment community do deviations from the model permeate? Does it pay for the average investor (or the average economist) to expend resources searching out little known information? Are such activities even generally profitable for various groups of market "professionals"? More generally, who are the people in the investment community that have access to "special information"?</p> <p class="body">Recent work had focused on the performance of mutual fund managers. If they were able to consistently outperform the markets, this would suggest they possessed useful insights or information. CAPM provided a framework for considering their performance on a risk-adjusted basis. This was important because managers could boost their absolute returns by merely increasing the <a href="../articles/capital_asset_pricing_model.htm">systematic risk</a> (<a href="../articles/beta.htm">beta</a>) of their portfolio—which had nothing to do with their ability to time the market or pick stocks. Various <a href="../articles/risk_metric_and_risk_measure.htm">metrics</a> for a manager's risk-adjusted performance were proposed, including <a href="../articles/sharpe_ratio.htm">Treynor's ratio</a> (<a href="#Treynor">1965</a>), <a href="../articles/sharpe_ratio.htm">Sharpe's ratio</a> (<a href="#Sharpe66">1966</a>) and Jensen's alpha (<a href="#Jensen">1968</a>). Fama cited all three papers, but he focused on Jensen's study, which looked at 115 mutual funds, primarily over the period 1955-1964. He found that, on average, investors who put their money in mutual funds over those ten years would have ended up with a portfolio worth 15% less than if they had passively invested in the broad market. The underperformance could be attributed to expenses associated with the mutual funds. Not counting the effects of loads, fees or <a href="../articles/transaction_costs.htm">transaction costs</a>, the mutual funds' performance approximately matched the overall market. The number of funds that performed well was less than would be expected if funds' performance was purely a matter of luck. Also, Jensen found that strong performance tended to not persist. A fund that outperformed in one subperiod was no more likely to outperform in the subsequent subperiod than was any other fund. In summary, the evidence suggested that mutual funds were not adding value before fees and other expenses, and they were squandering considerable value after fees and other expenses.</p> <p class="body">Jensen's study and others like it were a devastating blow to the mutual fund industry. Within a few years, passively managed index mutual funds were being offered to investors. These generally had no loads, low fees and, because they bought and held the stocks comprising specific equity indexes, minimal transaction costs. Index funds have routinely outperformed actively managed mutual funds ever since.</p> <p class="body">Fama's efficient market hypothesis has been an extremely influential theory. Investors are well advised to accept it unequivocally because violations that are significant enough to afford trading opportunities are 1) rare, 2) likely illegal, and 3) if not illegal, unlikely to be advertised to the retail or institutional investing public. One of the oldest questions to plague Wall Street brokers is: if their investment ideas (technical analysis, stock tips, buy-write programs, etc.) are so good, why do brokers give them away rather than exploit them themselves?</p> <p class="body">But violations of strong or semi-strong efficiency have been documented. There is even a literature on market anomalies, documenting violations of weak efficiency, although these generally are too minor to afford profit opportunities after transaction costs.</p> <p class="body">Jones and Litzenberger (<a href="#Jones">1970</a>) published one of the first significant violations of semi-strong efficiency. Suspecting that the markets respond slowly to unexpectedly good earnings announcements, they constructed portfolios of stocks that had recently announced such earnings and found that the portfolios outperformed the overall market in subsequent months. The phenomenon was observable in every one of ten overlapping periods they considered between 1964 and 1967, and it was significant enough to earn excess returns after transaction costs.</p> <p class="body">Financial institutions have also identified a few violations of semi-strong efficiency over the years. Not surprisingly, they didn't give these gems away to clients. The firms kept quiet and reaped massive profits for themselves. One such opportunity was pairs trading, which Morgan Stanley exploited in the 1980s. Another was <a href="../articles/market_neutral_strategy.htm">fixed income arbitrage</a>, which Salomon Brothers had a team of professionals exploit a decade later. Such violations don't last, since traders soon exploit the opportunities out of existence. Don't try pairs trading. the technique is so widely known today that there are books on the subject. I doubt anyone has made a dime from it in the last ten years. As for fixed income arbitrage, the Salomon team set up their own hedge fund, Long-Term Capital Management (LTCM), but by then, other hedge funds and brokers were in on the act. Profits were tight and LTCM dabbled in other, unproven speculative trading strategies. These eventually blew up, and the fund's <a href="../articles/leverage.htm">leverage</a> caused it to fail.</p> <p class="body">Today's boom in <a href="../articles/hedge_fund.htm">hedge funds</a> in <i>not</i> a violation of the efficient market hypothesis. There is not a scrap of evidence that hedge funds consistently outperform the market. There is, however, a tremendous amount of hype about flawed industry studies that claim they have. These studies are based on incomplete performance data compiled in ways that is known to introduce significant biases. If anything, the efficient market hypothesis has demonstrated how rare it is to outperform the markets, which suggested there is something peculiar about the thousands of hedge funds being started up each year—each year taking the place of other thousands of hedge funds that are quietly shut down without any public explanation. Brokers and hedge fund managers are getting rich off the hedge fund boom, but investors are not.</p> <p class="body">The efficient market hypothesis has never been much of a match for the marketing machine of Wall Street. Still, it has had more influence than most academic theories. Today, trillions of dollars are invested in index funds. The efficient market hypothesis is also kept before the public with Burton Malkiel's popular book <i><a href="http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2FRandom-Walk-Down-Wall-Street%2Fdp%2F0393062457%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1186518858%26sr%3D1-1&tag=contingencyanaly&linkCode=ur2&camp=1789&creative=9325">A Random Walk Down Wall Street</a><img src="http://www.assoc-amazon.com/e/ir?t=contingencyanaly&l=ur2&o=1" width="1" height="1" border="0" alt="" style="border:none !important; margin:0px !important;" /></i>. The engrossing book targets individual investors, but its insightful discussions of the random walk hypothesis, efficient market hypothesis and <a href="../articles/portfolio_theory.htm">portfolio theory</a> have educated entry-level professionals since the book was first released in 1973. Any professional involved in trading or investing who has not read it should consider himself culturally illiterate.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table9"> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table11"> <tr> <td width="25%" align="center" valign="top">  </td> <td width="25%" align="center" valign="top">   </td> <td width="25%" align="center" valign="top">  </td> <td width="25%" align="center" valign="top">  </td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table12"> <tr> <td width="100%"> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/random_walk_hypothesis.htm">random walk hypothesis</a> Financial model based on the empirical observation that stock and commodity prices behave like a random walk.</strong><p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/RAPM.htm">risk-adjusted performance metric</a> Any metric of performance that balances reward against risk.</strong></td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" width="75"> <img border="0" src="../images/ad_side_banner_1.jpg" width="103" height="285"><img border="0" src="../images/ad_side_banner_2.jpg" width="103" height="285"><img border="0" src="../images/ad_side_banner_3.jpg" width="103" height="285"></td> <td bgcolor="#FFFFCC" width="99%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Courses</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table13"> <tr> <td width="100%"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table14"> <tr> <td width="127" bgcolor="#669933" align="left" valign="top"> <img border="0" src="../images/picture_course_math.jpg" width="125" height="125"></td> <td width="100%" align="left" valign="top"> <p class="explanatory_text"><b> <font size="2"> <a target="_blank" href="http://www.risklearning.com/link/math_1.htm">Financial Math 1</a></font></b></p> <p class="explanatory_text">This is the first in a series of three-day courses on financial mathematics that take participants from pre-calculus to stochastic calculus. 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This orients them to the literature and gives them the confidence to apply what they have learned back on the job.</td> </tr> </table> </div> </td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">References</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table20"> <tr> <td width="100%"> <p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Ball">Ball</a>, Ray and Phillip Brown (1968). An empirical evaluation of accounting income numbers, <i>Journal of Accounting Research</i>, 6 (2), 159-178.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Cowles">Cowles</a>, Alfred 3rd (1933). Can stock market forecasters forecast? <i> Econometrica</i>, 1 (3), 309-324.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Fama_65a">Fama</a>, Eugene F. (1965a). The behavior of stock market prices, <i> Journal of Business</i>, 38 (1), 34-105.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Fama_65b">Fama</a>, Eugene F. (1965b). Random walks in stock prices, <i>Financial Analysts Journal</i>, 21 (5), 55-59.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Fama_1970">Fama</a>, Eugene F. (1970). Efficient capital markets: A review of theory and empirical work, <i>Journal of Finance</i>, 25 (2), 383-417.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Fama_et_al_1969">Fama</a>, Eugene F., Lawrence Fisher, Michael Jensen and Richard Roll (1969). The adjustment of stock prices to new information, <i> International Economic Review</i>, 10 (1), 1-21.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Friend">Friend</a>, Irwin, F. E. Brown, Edward S. Herman, and Douglas Vickers (1962). <i>A Study of Mutual Funds: Investment Policy and Investment Company Performance</i>, Report to the Committee on Interstate and Foreign Commerce, House Report no. 2274, 87th Congress, Second Session.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Horowitz">Horowitz</a>, Ira (1963). The varying (?) quality of investment trust management, <i>Journal of the American Statistical Association</i>, 58 (304), 1011-1032.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Jensen">Jensen</a>, Michael (1968). The performance of mutual funds in the period 1945-1964, <i>Journal of Finance</i>, 23 (2), 389-416<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Jones">Jones</a>, Charles P. and Robert H. Litzenberger (1970). Quarterly earnings reports and intermediate stock price trends, <i>Journal of Finance</i>, 25 (1), 143-148.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Lintner">Lintner</a>, John (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, <i>Review of Economics and Statistics</i>, 47: 13-37.<p class="explanatory_text"> <img border="0" src="../images/bullet_book.gif" width="21" height="15">Malkiel, Burton (1973). <i><a href="http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2FRandom-Walk-Down-Wall-Street%2Fdp%2F0393062457%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1186518858%26sr%3D1-1&tag=contingencyanaly&linkCode=ur2&camp=1789&creative=9325">A Random Walk Down Wall Street</a><img src="http://www.assoc-amazon.com/e/ir?t=contingencyanaly&l=ur2&o=1" width="1" height="1" border="0" alt="" style="border:none !important; margin:0px !important;" /></i>, New York: Norton.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Scholes">Scholes</a>, Myron (1969). A test of the competitive hypothesis: The market for new issues and secondary offerings, doctoral thesis, University of Chicago.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Sharpe">Sharpe</a>, William F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk, <i>Journal of Finance</i>, 19 (3), 425-442.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Sharpe66">Sharpe</a>, William F. (1966). Mutual fund performance, <i>Journal of Business</i>, 39 (1) Part 2, Supplement, 119-138.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Treynor">Treynor</a>, Jack (1965). How to rate management of investment funds, <i> Harvard Business Review</i>, 43 (1), 63-75.<p class="explanatory_text"> <img border="0" src="../images/bullet_paper_glossary.gif" width="21" height="15"><a name="Waud">Waud</a>, Roger N. (1970). Public interpretation of discount rate changes: Evidence on the announcement effect. <i>Econometrica</i>, 38 (2), 231-250</td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" width="75"> <img border="0" src="../images/ad_side_banner_1.jpg" width="103" height="285"><img border="0" src="../images/ad_side_banner_2.jpg" width="103" height="285"><img border="0" src="../images/ad_side_banner_3.jpg" width="103" height="285"></td> <td bgcolor="#FFFFCC" width="99%">  <p class="ad_legend" style="margin-left: 0; margin-bottom:2"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font color="#000000">Ads by Contingency Analysis</font></a></p> <p style="margin-top: 0; margin-bottom: 0"> <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82436;type=iframe" style="margin: 0px; padding: 0px; border-width: 0px" width="336" height="265" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" name="I15"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82436;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=336x265;setID=82436"> <img src="http://servedbyadbutler.com/adserve.ibs/;ID=147917;size=336x265;setID=82436;type=img" border="0" height="265" width="336" alt=""></a> </noscript><![endif]></iframe>   </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Forum Discussions</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table21"> <tr> <td width="100%"> <p class="explanatory_text"> <img border="0" src="../images/bullet_bullhorn_narrow.gif" align="left" width="27" height="22"></td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related External Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table22"> <tr> <td width="100%"> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"></td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Footnotess</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table23"> <tr> <td width="100%"> <p class="explanatory_text"> <a name="footnote_[1]">[1]</a> Fama (1965a), p. 34. [<a href="#[1]">return</a>]<p class="explanatory_text"> <a name="footnote_[2]">[2]</a> Fama (1965b), p. 56. [<a href="#[2]">return</a>]<p class="explanatory_text"> <a name="footnote_[3]">[3]</a> Fama (1965b), p. 58. [<a href="#[3]">return</a>]<p class="explanatory_text"> <a name="footnote_[4]">[4]</a> Fama (1970), p. 410. 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