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Summary Article: Eugene Fama Author of the efficient markets hypothesis
from QFinance: The Ultimate Resource
LIFE AND CAREER

Eugene Fama was a tenured professor at the University of Chicago before he was 30, where he taught portfolio theory before modern finance became established. He has spent his career at the Graduate School of Business, University of Chicago, where he revolutionized thinking on the efficient markets hypothesis, and where he is now Chairman of its Center for Research in Security Prices. He is also Director of Research at Dimensional Fund Advisors, and is an advisory editor of the Journal of Financial Economics. He was the first elected Fellow of the American Finance Association, and is also a Fellow of the Econometric Society and the American Academy of Arts and Sciences. He has received numerous honorary degrees, and was the co-winner of the Smith Breeden Prize for the best paper in the Journal of Finance in 1992, and received the first Deutsche Bank Prize in Financial Economics in 2005.

KEY THINKING
  • Eugene Fama is a prolific author and researcher, having written two books, and published more than 100 articles in academic journals. He is among the most cited of America’s financial researchers.

  • He is identified with research on markets, particularly with regard to developments in the efficient market hypothesis, and the random walk theory, as well as his workon portfolio theory and asset pricing, both theoretical and empirical.

  • Coined the term “efficient markets theory” in a 1970 paper on efficient capital markets, arguing that it is practically impossible for someone to consistently beat the stock market because of the wide availability of information.

  • He was the first of many to study how stock prices respond to an event, using price data from a newly available database.

  • Focuses much of his study on the relation between risk and return, and the implications for portfolio management.

  • Has also made innovations in how we understand the functioning of markets, asset pricing theory, and corporate finance

IN PERSPECTIVE
  • He helped popularize the efficient market hypothesis, and the random walk theory.

  • The efficient market hypothesis evolved from his PhD thesis, and suggested that stock markets are efficient because securities will be appropriately priced, and reflect all available information in a market with well-informed investors.

  • The random walk theory was discussed in one of his papers, concluding that stock price movements are unpredictable, and follow a random walk.

  • His work on efficient markets proposed two key improvements, by classifying three types of efficiency—strong form, semi-strong form, and weak efficiency—and by identifying the notion of market efficiency with the model of market equilibrium.

  • His work on the efficiency of markets has helped create many new finance products, and aided the development of new futures contracts for hedging risks.

  • He has written a series of papers with Kenneth French that question the validity of the capital asset pricing model (CAPM), as not taking into account market capitalization and book value to market value.

  • In portfolio management, Fama and French also developed a successful three-factor model to describe market behavior.

“In an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.”

Eugene Fama
Copyright © Bloomsbury Information Ltd, 2009, 2011, 2012, 2013, 2014

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