EMH Taxonomy

The classic taxonomy of information sets, due to Roberts (1967), and used by Fama (1970) includes the following:

Redefined by Fama (1991):

"The 1970 review divides work on market efficiency into three categories: (1) weak-form (How well do past returns predict future returns?), (2) semi-strong-form tests (How quickly do security prices reflect public information announcements?), and (3) strong-form tests (Do any investors have private information that is not fully reflected in market prices?) At the risk of damning a good thing, I change the categories in this paper.

Instead of weak-form tests, which are only concerned with the forecast power of past returns, the first category now covers the more general area of tests for return predictability, which also includes the burgeoning work on forecasting returns with variables like dividend yields and interest rates. Since market efficiency and equilibrium-pricing issues are inseparable, the discussion of predictability also considers the cross-sectional predictability of returns, that is, tests of asset-pricing models and the anomalies (like the size effect) discovered in the tests. Finally, the evidence that there are seasonals in returns (like the January effect), and the claim that security prices are too volatile are also considered, but only briefly, under the rubric of return predictability.

For the second and third categories, I propose xchanges in title, not coverage. Instead of semi-strog-form tests of the adjustment of prices to public announcements, I use the now common title, event studies. Instead of strong-form tests of whether specific investors have information not in market prices, I suggest the more descriptive title, tests for private information."