A Tale of Market Efficiency

The efficient market hypothesis (EMH) has been subject to debate for decades. The field of behavioral finance was developed in response to the body of anomalous evidence with regard to the EMH. Considering theoretical and empirical research, we summarize the debate on weak form market efficiency. Testing methodologies developed in the early aftermath of the first discussions are explored and recent alternative approaches are reviewed. As a way out of the stalemate, we consider Lo's adaptive markets hypothesis (AMH). However, some empirical inconsistencies in the observed pattern of efficiency keep this theory from entering mainstream academic finance. From our review of the tale of market efficiency, we suggest that future research is geared towards the further development of time-varying test methodologies and the establishment of a new theoretical framework on efficiency to go along with the empirical findings.