We've visited the FFF a few times most recently in "Fama/French: "Luck versus Skill in Mutual Fund Performance" (LMVTX)":
There are little treasures scattered everywhere on the internet, here's one of them.Which is as good an intro as any for:
From the Fama/French Forum at Dimensional Fund Advisors....
We often hear the claim that some markets are less efficient than others—small company stocks, emerging markets, foreign exchange, and so on. Is there any evidence to support this assertion?
EFF: Nothing convincing we know of.
KRF: It is interesting to consider a few of the arguments behind this conclusion. One of the simplest is that there are neglected assets. If no one is paying attention to a group of small stocks, for example, how could their prices possibly be accurate? Although I am skeptical, this argument may have had some merit 150 years ago. It seems implausible today, however, given modern technology and the hundreds of billions of dollars investors spend each year trying to find pricing errors.
A closely related argument is that investors in some markets are ripe for the picking because they are just not as sharp as the rest of us. This seems to be the logic behind some investors' belief that emerging markets are less efficient than developed markets. It does not take much thought to reject the premise of the argument. People are bright and highly motivated in markets around the world. But even if we ignore that fact, there are so many developed-market investors looking for opportunities in emerging markets (and so many emerging-market investors looking for opportunities in developed markets), it again seems implausible that differences in ability produce differences in the level of efficiency.
Perhaps the most sophisticated justification for these claims is based on Shleifer and Vishny's (1997) limits of arbitrage argument. This theory suggests that if there are pricing errors, they will be larger in markets with relatively high trading costs and other frictions. For example, in many regions of the US, residential real estate commissions are 6%. These costs prevent informed real estate investors from setting up trading strategies to exploit relatively large deviations from the "right" price. In other words, pricing errors may persist because active strategies designed to exploit them are hampered by trading costs and other frictions...MORE