A Review Of Efficient Markets Hypothesis: An Analysis Of Eugene Fama And Ken French's Research

Abstract

The field of Finance has moved from the single factor model first created by Sharpe in 1964, into modern day with the Fama-French five-factor model. Each step in the chronology of empirically tested models of equilibrium adds more risky variables in an attempt to understand exactly how, we as humans, price risky assets. Each superseding model seems to offer more explanatory power, but how strong are the variables realistically and is it possible to achieve outperformance on the basis of these variables alone? This paper will test the research presented by Eugene Fama and Kenneth French in an attempt to understand if markets truly are efficient, or if it is possible to achieve statistically significant returns, implying consistent mispricing prevalent in the market.