The Rate of Market Efficiency

We define two measures: the Model Performance Ratio (MPR), which ranks asset pricing models based on their ability to price random portfolios, and the Rate of Market Efficiency (RME), which measures market efficiency assuming the best pricing model (largest MPR). We find that: (i) market efficiency has almost doubled in the last four decades; (ii) the CAPM is the best performing model among five linear factor specifications. The first result is in sharp contrast with the evolution of thinking about market efficiency and the rise of behavioral finance; the second, casts serious doubts on the Fama and French paradigm