Three Americans share Nobel Prize in Economics

14 Oct 2013


Three Americans, Eugene Fama, Lars Peter Hansen and Robert Shiller have won the 2013 Nobel Prize for economics for developing new methods to study the long-term behaviour of asset prices.

Eugene Fama, Lars Peter Hansen and Robert ShillerThe Royal Swedish Academy of Sciences said it has decided to award `The Sveriges Riksbank Prize in Economic Sciences' in memory of Alfred Nobel for 2013 to Eugene F Fama, Lars Peter Hansen and Robert J Shiller – all of the US - "for their empirical analysis of asset prices,'' that laid the foundation of the current understanding of asset markets.

''There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analysed by this year's Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller,'' the Academy said in a release.

Eugene Fama and several associates have demonstrated through empirical evidence, beginning the 1960s, that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices.

These findings, based on empirical evidence, not only impacted research but also changed market practice.

The emergence of so-called index funds in stock markets all over the world is an offshoot of their studies.

Robert Shiller discovered in the early 1980s 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.

These findings, based on rational investor behaviour, tries to interpret the response to uncertainty in prices. High future returns are then viewed as compensation for holding risky assets during unusually risky times.

Lars Peter Hansen developed a statistical method 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.

Another approach focuses on departures from rational investor behavior. So-called behavioral finance takes into account institutional restrictions, such as borrowing limits, which prevent smart investors from trading against any mispricing in the market.

The laureates have laid the foundation for the current understanding of asset prices. It relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.

Eugene F Fama, a US citizen born in 1939 in Boston, holds a PhD from the University of Chicago and is Robert R McCormick Distinguished Service Professor of Finance at University of Chicago, USA.

Lars Peter Hansen, a US citizen born in 1952, holds a PhD from the University of Minnesota, Minneapolis and is David Rockefeller Distinguished Service Professor in Economics and Statistics at University of Chicago, USA.

Robert J Shiller, a US citizen born in 1946, holds a PhD from the Massachusetts Institute of Technology (MIT), and is Sterling Professor of Economics at Yale University, USA.

The three will equally share the prize amount of SEK 8 million.

The economics award is not a Nobel Prize in the same sense as the medicine, chemistry, physics, literature and peace prizes, which were created by Swedish industrialist Alfred Nobel in 1895. Sweden's central bank added the economics prize in 1968 as a memorial to Nobel.

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