Stockholm / Washington - Eugene Fama, Robert Shiller and Lars Peter Hansen shared the 2013 Nobel Prize in Economic Sciences for their work toward creating a deeper knowledge of how market prices move.
“The laureates have laid the foundation for the current understanding of asset prices,” the Royal Swedish Academy of Sciences said yesterday in Stockholm. “It relies in part on fluctuations in risk and risk attitudes, and in part on behavioural biases and market frictions.”
Spanning almost 50 years of research, the three laureates have built knowledge, and exposed holes in our understanding, of how asset prices move, spurring the creation of index funds and also helping to predict the US housing market crash last decade. They have shown it is difficult to predict price movements in the short run, but easier in the long run, and have devised statistical methods of testing rational theories of asset pricing.
Fama, 74, known among economists as the “father of modern finance”, is a professor at the University of Chicago. In the mid-1960s he propounded theories that argued stock price movements were unpredictable and followed a “random walk”, making it impossible for any investor, even a professional, to gain an advantage.
He also showed that so-called value and small-cap stocks have higher returns than growth stocks, and he rejected the notion that markets often produced bubbles.
The Nobel committee’s decision this year marks a “very interesting collection because Fama is the founder of the efficient market theory and Shiller at least is one of the critics of it”, Robert Solow, the winner of the Nobel economics prize in 1987 and professor emeritus at the Massachusetts Institute of Technology in Cambridge, said. “You can understand why they wanted a prize in finance. It’s an odd action. It was just an indication that what they were interested in was all those that had contributed to the modern theory of finance at both ends of the spectrum.”
The study of housing prices has been a long-standing interest to Shiller, an economics professor at Yale University. Dissatisfied with the existing data, he and Karl Case created the Standard & Poor’s/Case-Shiller home price indices. Their index captured US home prices doubling from 2000 to mid-2006 and then plunging 35 percent amid the worst financial crisis since the Great Depression. – Bloomberg