2013
SVERIGES RIKSBANK PRIZE IN ECONOMIC SCIENCES
IN MEMORY OF ALFRED NOBEL
The Sveriges Riksbank
Prize in Economic Sciences in Memory of Alfred Nobel 2013 was awarded jointly
to Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller "for their
empirical analysis of asset prices".
Trendspotting
in 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 analyzed by this year’s
Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.
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.
If prices are nearly
impossible to predict over days or weeks, then shouldn’t they be even harder to
predict over several years? The answer is no, as Robert Shiller discovered
in the early 1980s. He 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.
One approach interprets
these findings in terms of the response by rational investors 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
Born: 1939,
Boston, MA, USA
Affiliation at the time
of the award: University of Chicago, Chicago, IL, USA
Prize motivation: "for
their empirical analysis of asset prices"
Lars
Peter Hansen
Born: 1952
Affiliation at the time
of the award: University of Chicago, Chicago, IL, USA
Prize motivation: "for
their empirical analysis of asset prices"
Robert J.
Shiller
Born: 1946,
Detroit, MI, USA
Affiliation at the time
of the award: Yale University, New Haven, CT, USA
Prize motivation: "for
their empirical analysis of asset prices"
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