The 2013
Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was
awarded jointly to Eugene F. Fama and
Lars Peter Hansen of of University of Chicago, IL, USA, and Robert J. Shiller of Yale University, New Haven, CT, USA "for their empirical analysis of asset prices," said Nobel Committee in its press release. The trio will share the coveted 8 m Swedish Kroner ($1.2 m) prize money for their pioneering discoveries on predicting the asset prices using empirical models, which provide greater understanding of how financial markets work and stock prices react over a longer periods of time, say 3-7 years horizon. Fama and his colleagues
studied short-term predictability of asset prices from different angles and found that the
amount of short-run predictability in stock markets is very limited. This has had a profound impact on the academic literature as well
as on market practices.
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. Hansen made fundamental contributions first by developing an econometric method – the Generalized Method of Moments (GMM), the findings of which broadly supported Shiller's preliminary conclusions that asset prices fluctuate too much to be reconciled with standard theory, the so-called Consumption Capital Asset Pricing Model (CCAPM). Together, the three Laureates have laid the foundation for current understanding of the asset prices. When asked about his first reaction over telephone by one of the committee members, Professor Shiller expressed his disbelief and replying to a question about the predictability of asset pricing, he felt that there's an element of uncertainty and irreducible human element in predicting what asset prices will do and that's part of the reason why the field of finance will never completely understand asset pricing movements.
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Source: Adapted from "The Prize in Economic Sciences 2013 - Popular Information".
Nobelprize.org, and citations therein.
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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. Hansen made fundamental contributions first by developing an econometric method – the Generalized Method of Moments (GMM), the findings of which broadly supported Shiller's preliminary conclusions that asset prices fluctuate too much to be reconciled with standard theory, the so-called Consumption Capital Asset Pricing Model (CCAPM). Together, the three Laureates have laid the foundation for current understanding of the asset prices. When asked about his first reaction over telephone by one of the committee members, Professor Shiller expressed his disbelief and replying to a question about the predictability of asset pricing, he felt that there's an element of uncertainty and irreducible human element in predicting what asset prices will do and that's part of the reason why the field of finance will never completely understand asset pricing movements.
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