Stock Market Prices Do Not Follow Random Walks:Evidence from a Simple Specification Test

SINCE KEYNES' (1936) NOW FAMOUS PRONOUNCEMENT that most investors'decisions can only be taken as a result of animal spirits-of a spontaneousurge to action rather than inaction, and not as the outcome of a weightedaverage of benefits multiplied by quantitative probabilities, a great dealof research has been devoted to examining the efficiency of stock marketprice formation. In Fama's (1970) survey, the vast majority of those studieswere unable to reject the efficient markets hypothesis for common stocks .Although several seemingly anomalous departures from market efficiencyhave been well documented,I many financial economists would agree withensen's (1978a) belief that there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Markets Hypothesis .