This paper merges two independent projects, Campbell and Lettau (1999) and Malkiel and Zu (1999). Campbell and Lettau are grateful to Sangjoon Kim for his contributions to the first version of their paper, Campbell, Kim and Lettau (1994). We thank two anonymous referees and René Stulz for useful comments. Jung-Wook Kim and Matt Van Vlack provided able research assistance. The views are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York, the Federal Reserve System or the National Bureau of Economic Research. Any errors and omissions are the responsibility of the authors.

Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behaviorial elements of stock-price determination and by econometricians who argue that stock returns are, to a considerable extent, predictable. This survey examines the attacks on the efficient market hypothesis and the relationship between predictability and efficiency. I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe.

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Several recent studies suggest that equity mutual fund managers achieve superior returns and that considerable persistence in performance exists. This study utilizes a unique data set including returns from all equity mutual funds existing each year. These data enable us more precisely to examine performance and the extent of survivorship bias. In the aggregate, funds have underperformed benchmark portfolios both after management expenses and even gross of expenses. Survivorship bias appears to be more important than other studies have estimated. Moreover, while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s. THE ACADEMIC VIEW OF the pricing of securities has become considerably more complicated over the past decade. By the early 19708, the efficient market hypothesis became the accepted paradigm in the academy. The history of past stock prices appeared to provide no helpful information in predicting future price movements. Moreover, securities' prices appeared to incorporate all fundamental information so rapidly and efficiently that an uninformed investor, buying at the current tableau of, prices, could earn returns equivalent to those available to the experts. In short, markets were proclaimed to be remarkably efficient.By the early 1980s, however, several cracks appeared in the efficient market edifice. Returns from stocks from period to period were not independent: they were positively correlated over short time spans and negatively correlated when measured over longer periods.' Also, various seasonal and day-of-the-week patterns were isolated. Moreover, there appeared to be a considerable degree of predictability of stock returns on the basis of certain fundamental variables, such as initial dividend yields, market capitalization (size), price-earnings ratios, and price-to-book-value ratios.2 Of course, return predictability need not imply inefficiency of equity markets. Time-series tests of return predictability may reflect rational variation through time in ex-*Malkiel is from Princeton University. I am indebted to Yexiao Xu for invaluable research assistance, to Lipper Analytic Services for providing the datasets, to Ren6 Stulz and an anonymous referee for very helpful comments, and to Princeton University's Center for Economic Policy Studies for financial support.'Earlier work suggests that serial correlation coefficients for stock returns were close to zero. See, for example, Kendall(1953), Osborne (19591, Alexander (19611, andMoore (1964). 'See Fama (19911, Fama and French (19921, and Fluck, Malkiel, and Quandt (1993) for a review of the literature on return predictability. 3Similar results were reported by "reynor (1965) and Sharpe (1966). *If persistence is driven by consistent poor performance, investors would not be able to earn excess returns unless they could sell a fund short. Moreover, if positive persistence is influenced by survivorship bias (as will be indicated below), selection of funds by past superior performance...

This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period 1962-97 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, while the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.

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This paper studies the behavior of idiosyncratic volatility for the post war period. Using aggregate idiosyncratic volatility statistics constructed from the Fama and French (1993) three-factor model, we find that the volatility of individual stocks appears to have increased over time. This trend is not solely attributed to the increasing prominence of the NASDAQ market. We go on to suggest that the idiosyncratic volatility of individual stocks is associated with the degree to which their shares are owned by financial institutions. Finally, we show that idiosyncratic volatility is also positively related to expected earning growth. * This work was supported by the Princeton University Center for Economic Policy Studies Investigating the Behavior of Idiosyncratic Volatility AbstractThis paper studies the behavior of idiosyncratic volatility for the post war period. Using aggregate idiosyncratic volatility statistics constructed from the Fama and French (1993) three-factor model, we find that the volatility of individual stocks appears to have increased over time. This trend is not solely attributed to the increasing prominence of the NASDAQ market. We go on to suggest that the idiosyncratic volatility of individual stocks is associated with the degree to which their shares are owned by financial institutions. Finally, we show that idiosyncratic volatility is also positively related to expected earning growth.