The Rate of Market Efficiency

62 Pages Posted: 20 Mar 2012 Last revised: 13 Oct 2014

Rasa Karapandza

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting

Jose M. Marin

Universidad Carlos III de Madrid

Date Written: October 12, 2014

Abstract

We define two measures: the Model Performance Ratio (MPR), which ranks asset pricing models based on their ability to price random portfolios, and the Rate of Market Efficiency (RME), which measures market efficiency assuming the best pricing model (largest MPR). We find that: (i) market efficiency has almost doubled in the last four decades; (ii) the CAPM is the best performing model among five linear factor specifications. The first result is in sharp contrast with the evolution of thinking about market efficiency and the rise of behavioral finance; the second, casts serious doubts on the Fama and French paradigm.

Keywords: market efficiency, MEH, Fama-French, pricing anomalies, momentum

JEL Classification: G12, G14, C58, N20, B26

Suggested Citation

Karapandza, Rasa and Marin, Jose M., The Rate of Market Efficiency (October 12, 2014). Available at SSRN: https://ssrn.com/abstract=2024552 or http://dx.doi.org/10.2139/ssrn.2024552

Rasa Karapandza (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

Jose M. Marin

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

HOME PAGE: http://www.josemarin.com

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