fama-1970

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title: Fama (1970) Efficient Capital Markets: A Review of Theory and Empirical Work tags: [efficient-markets, asset-pricing, fair-game, martingale, random-walk, empirical-finance, literature-survey] sources: [] updated: 2026-08-13 kind: paper author: Eugene F. Fama date: 1970-01-01 url:

Summary

Fama's canonical review organizes the theory and evidence on efficient capital markets — markets in which prices "fully reflect" all available information. He formalizes efficiency as a "fair game" in expected returns, distinguishes three information subsets (weak, semi-strong, strong form), and surveys the empirical literature testing each. His verdict (as of 1970): with few exceptions, the efficient-markets model stands up well.

Key Claims

• Definition. A market is efficient if security prices fully reflect available information $\Phi_t$; then no trading system based on $\Phi_t$ earns expected returns above equilibrium expected returns.
• Fair-game formalization. Excess return $z_{j,t+1}=r_{j,t+1}-E(r_{j,t+1}\mid\Phi_t)$ satisfies $E(z_{j,t+1}\mid\Phi_t)=0$; the sequence is a fair game with respect to $\{\Phi_t\}$, so any trading system has zero expected excess value.
• Submartingale and random-walk special cases. The submartingale ($E(p_{t+1}\mid\Phi_t)\ge p_t$) and the random walk (i.i.d. successive returns) are tractable specializations; the random walk is a stronger claim about the entire return distribution, not just its conditional mean.
• Three forms of tests. Weak (information = past prices; serial correlation, runs, filter rules), semi-strong (public information; event studies such as Fama-Fisher-Jensen-Roll 1969 on splits), and strong (all information including private; insider and mutual-fund studies).
• Sufficient conditions. No transaction costs, freely available information, and investor agreement on the price implications of information — sufficient but not necessary for efficiency.
• Verdict. The evidence broadly supports weak- and semi-strong-form efficiency; strong-form efficiency is rejected where some agents (e.g. specialists, insiders) have monopolistic information.

Concepts Introduced or Extended

• Efficient Market Hypothesis

Entities Mentioned

• Eugene F. Fama

Quotes

"A market in which prices always 'fully reflect' available information is called 'efficient.'"

My Take

The paper that set the vocabulary — weak/semi-strong/strong form, fair game, the price-as-signal ideal — and framed efficiency as a testable statistical property rather than a slogan. Its most durable and double-edged legacy is the joint-hypothesis problem it makes explicit only implicitly here and sharpens in Fama (1991): because a test of efficiency presupposes an equilibrium expected-return model, no anomaly can be cleanly attributed to inefficiency rather than a mis-specified model. That is exactly why the literature turned to richer asset-pricing models — the road that leads to the EMH's natural sequel, multi-factor models like Fama-French. The 1970 optimism ("stands up well") was later tempered by the anomalies literature, but the framework remains the null everyone argues against.