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Efficient Capital Markets, Steven L. Jones and Jeffry M. Netter
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More serious challenges to the EMT emerged from research on long-term returns. Robert Shiller (1981) argued that stock index returns are overly volatile relative to aggregate dividends, and many took this as support for Keynes’s view that stock prices are driven more by speculators than by fundamentals. Related work by Werner DeBondt and Richard Thaler (1985) presented evidence of apparent overreaction in individual stocks over long horizons of three to five years. Specifically, the prices of stocks that had performed relatively well over three- to five-year horizons tended to revert to their means over the subsequent three to five years, resulting in negative excess returns; the prices of stocks that had performed relatively poorly tended to revert to their means, resulting in positive excess returns. This is called “reversion to the mean” or “mean reversion.” Lawrence Summers (1986) showed that, in theory, prices could take long, slow swings away from fundamentals that would be undetectable with short horizon returns. Additional empirical support for mispricing came from Narasimhan Jegadeesh and Sheridan Titman (1993), who found that stocks earning relatively high or low returns over three- to twelve-month intervals continued the trend over the subsequent three to twelve months.

 

Further Reading

DeBondt, Werner F. M., and Richard Thaler. “Does the Stock Market Overreact?” Journal of Finance 40 (1985): 793–805.
Fama, Eugene F. “The Behavior of Stock Market Prices.” Journal of Business 38 (January 1965): 34–105.
Fama, Eugene F. “Efficient Capital Markets: A Review of Empirical Work.” Journal of Finance 25, no. 2 (1970): 383–417.
Fama, Eugene F. “Efficient Capital Markets II.” Journal of Finance 46, no. 5 (1991): 1575–1617.
Fama, Eugene F. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics 49, no. 3 (1998): 283–306.
Fama, Eugene F., and Kenneth R. French. “Dividend Yields and Expected Stock Returns.” Journal of Financial Economics 22 (October 1988): 3–25.
Grossman, Sanford J., and Joseph E. Stiglitz. “On the Impossibility of Informationally Efficient Markets.” American Economic Review 70 (June 1980): 393–408.
Jegadeesh, Narasimhan, and Sheridan Titman. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance 48 (March 1993): 65–91.
Kendall, Maurice. “The Analysis of Economic Time Series, Part I: Prices.” Journal of the Royal Statistical Society 96 (1953): 11–25.
Keynes, John M. The General Theory of Employment, Interest and Money. New York: Harcourt, 1936.
Malkiel, Burton G. “The Efficient Market Hypothesis and Its Critics.” Journal of Economic Perspectives 17, no. 1 (2003a): 59–82.
Malkiel, Burton G. A Random Walk down Wall Street. 8th ed. New York: Norton, 2003b.
Mandelbrot, Benoit. “Forecasts of Future Prices, Unbiased Markets and ‘Martingale Models.’” Journal of Business, special supplement (January 1966): 242–255.
Mitchell, Mark, and Jeffry Netter. “Triggering the 1987 Stock Market Crash: Antitakeover Provisions in the Proposed House Ways and Means Tax Bill?” Journal of Financial Economics 24 (1989): 37–68.
Poterba, James M., and Lawrence Summers. “Mean Reversion in Stock Market Prices: Evidence and Implications.” Journal of Financial Economics 22 (1987): 27–59.
Roberts, Harry. “Stock Market ‘Patterns’ and Financial Analysis: Methodological Suggestions.” Journal of Finance 14 (1959): 11–25.
Samuelson, Paul. “Proof that Properly Anticipated Prices Fluctuate Randomly.” Industrial Management Review 6 (1965): 49.
Shiller, Robert J. “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” American Economic Review 71 (June 1981): 421–435.
Shiller, Robert J. “From Efficient Markets to Behavioral Finance.” Journal of Economic Perspectives 17, no. 1 (2003): 83–104.
Shleifer, Andrei, and Robert W. Vishny. “The Limits of Arbitrage.” Journal of Finance 52 (March 1997): 35–55.
Summers, Lawrence. “Does the Stock Market Rationally Reflect Fundamental Values?” Journal of Finance 41 (July 1986): 591–601.
Williams, John Burr. The Theory of Investment Value. Cambridge: Harvard University Press, 1938.