In Market Efficiency: Stock Market Behaviour in Theory and Practice, Andrew W. Lo has collected the major papers, both theoretical and empirical, that have defined the development of the theory of efficient capital markets. The first volume has an introduction by the editor and a foreword by Richard Roll. Both are brief—too brief, in my opinion—but excellent. The papers are grouped into five parts. In Volume I, Part I is “Theoretical Foundations.” The included articles are by Black (1986), Fama (1970), Grossman (1976), Grossman and Stiglitz (1980), LeRoy (1973), Lucas (1978), and Samuelson (1965). Part II is “The Random Walk Hypothesis.” The articles are by Cootner (1962), Cowles and Jones (1937), Fama (1965), Fama and Blume (1966), Fama and French (1988), French and Roll (1986), Jegadeesh (1990), Kim, Nelson, and Startz (1991), Lo (1991), Lo and MacKinlay (1988), Osborne (1959), Porterba and Summers (1988), and Richardson (1993). In Volume II, Part I is “Variance Bounds Tests.” Included articles are by Campbell and Shiller (1989), Flavin (1983), Gilles and LeRoy (1991), Grossman and Shiller (1981), Kleidon (1986), LeRoy and Porter (1981), Marsh and Merton (1986), Merton (1987), Michener (1982), Shiller (1981), and West (1988).

Mortgage originators offer borrowers various combinations of “points”—loan fees—and coupon: high points and low coupon or low points and high coupon. In this article points are interpreted as a device serving to separate borrowers with high prepayment probabilities from those with low prepayment probabilities. Borrowers and lenders are treated symmetrically: both are risk neutral and both have complete and frictionless access to credit markets (implying that borrowers can finance points if they wish), except that borrowers’ prepayment speeds are private knowledge. Equilibria are derived, both when borrowers cannot prepay voluntarily and when they can.

[Mortgage originators offer borrowers various combinations of "points"--loan fees--and coupon: high points and low coupon or low points and high coupon. In this article points are interpreted as a device serving to separate borrowers with high prepayment probabilities from those with low prepayment probabilities. Borrowers and lenders are treated symmetrically: both are risk neutral and both have complete and frictionless access to credit markets (implying that borrowers can finance points if they wish), except that borrowers' prepayment speeds are private knowledge. Equilibria are derived, both when borrowers cannot prepay voluntarily and when they can.]

We survey the variance-bounds tests of asset-price volatility, stressing the econometric aspects of these tests. The first variance-bounds tests of the present-value relation reported apparently striking evidence of excess volatility of asset prices. The statistical significance of the results, however, was either marginal or, in the case of model-free tests, impossible to assess. Moreover, the tests were soon criticized for a number of biases. Various other tests of the present-value relations were later developed, avoiding in different degrees the econometric problems attending the first-generation tests also found excess volatility, though sometimes of borderline statistical significance. This finding of excess volatility is robust and is difficult to explain within the representative-consumer, frictionless-market model. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

[We survey the variance-bounds tests of asset-price volatility, stressing the econometric aspects of these tests. The first variance-bounds tests of the present-value relation reported apparently striking evidence of excess volatility of asset prices. The statistical significance of the results, however, was either marginal or, in the case of model-free tests, impossible to assess. Moreover, the tests were soon criticized for a number of biases. Various other tests of the present-value relation were later developed, avoiding in different degrees the econometric problems attending the first-generation tests. The majority of these second-generation tests also found excess volatility, though sometimes of borderline statistical significance. This finding of excess volatility is robust and is difficult to explain within the representative-consumer, frictionless-market model.]