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2013 Nobel Prize in Economics: Fama, Hansen and Shiller

Written By: Jason Shafrin - Oct• 14•13

Today, the Nobel Prize in Economics was awarded to Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller. Here is a summary of their contribution to the field which earned them the award.

  • Eugene Fama. Beginning in the 1960s, Eugene Fama and several collaborators demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example.
  • Robert Shiller found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets. Alex Tabarrok adds: “Robert Shiller is best known for warning about the internet stock market bubble and later the housing bubble. What is most impressive to me, however, is that most people who think that markets can be inefficient are anti-market. Shiller’s solution to market problems, however, is more markets!”
  • Lars Peter Hansen developed the generalized methods of moments (GMM) econometric method, which is that is particularly well suited to testing rational theories of asset pricing. Using this method, Hansen and other researchers have found that modifications of these theories go a long way toward explaining asset prices. Marginal revolution has a nice overview of the GMM method.

Tyler Cowen weighs in with the following on the selection of both Fama and Shiller:

I feared that with the financial crisis Fama would be too unpopular a pick, because many people misinterpret “efficient markets theory,” so this was a prize which valued the economic impact of the research over the trendiness. That said, giving the prize to Shiller as well is a nod in the direction of behavioral finance and inefficient markets theory, so the committee covered all the bases.

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