Stock buble

The Behavior of Stock-Market Prices Eugene F. Fama The Journal of Business, Vol. 38, No. 1. (Jan., 1965), pp. 34-105.
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http://www.jstor.org Mon Mar 3 11:30:17 2008

T H E BEHAVIOROF STOCK-MARKET PRICES*
EUGENE F. FAMA?

many years the following question has been a source of continuing controversy in both academic and business circles: To what extent can the past history of a common stock's price be used to make meaningful predictions concerning the future price of the stock? Answers to this question have been provided on the one hand by the various chartist theoriesand on the other hand by the theory of random walks. Although there are many different chartist theories, they all make the same basic assumption. That is, they all assume that the past behavior of a security's price is rich in information concerning its future behavior. History repeats itself in that "patterns" of past price be-

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*This study has profited from the criticisms,suggestions, and technical assistance of many different people. I n particular I wish to express my gratitude to Professors William Alberts, Lawrence Fisher, Robert Graves, James Lorie, Merton Miller, Harry Roberts, and Lester Telser, all of the Graduate School of Business, University of Chicago. I wish es~ecially thank Professors Miller and Roberts for to providing not only continuous intellectualstimulation but also painstaking care in reading the various preliminary drafts. Many of the ideas in this paper arose out of the work of Benoit Mandelbrot o i t h e IBM Watson Research Center. I have profited not only from the written work of Dr. Mandelbrot but also from many invaluable discussion sessions. Work on this paper was supported in part by funds from a grant by the Ford Foundation to theGraduate School of Business of the University of Chicago, and in part by funds granted to the Center for Research in Security Prices of the School by the National Science Foundation. Extensive computer time was provided by the 7094 Computation Center of the University of Chicago.

havior will tend to recur in the future. Thus, if through careful analysis of price charts one develops anunderstanding of these "patterns," this can be used to predict the future behavior of prices and in this way increase expected gains.l By contrast the theory of random walks says that the future path of the price level of a security is no more predictable than the path of a series of cumulated random numbers. In statistical terms the theory says that successive price changes are independent, identically...