Two professors from the University of Chicago Booth School of Business, together with a third professor from Yale School of Management (SOM), have been awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013. The Royal Swedish Academy of Sciences honored Booth Professors Eugene Fama and Lars Peter Hansen and Yale SOM Professor Robert Shiller for their research helping to explain how and why the prices of stocks and bonds change over time.
The Nobel honors the three professors’ empirical analysis of asset prices, which began with Fama and collaborators in the 1960s demonstrating that stock prices are very difficult to predict in the short run, in part because new information is very quickly incorporated into the prices. “These findings not only had a profound impact on subsequent research but also changed market practice,” notes the Nobel announcement for the 2013 prize. As an example, the announcement cited the emergence of index stocks in markets around the globe.
Shiller then showed that while prices are nearly impossible to predict over days or weeks, they are less difficult to predict over several years. Specifically, Shiller’s research 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.
Hansen, for his part, developed a statistical method to test 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,” the Nobel announcement says.
Through their separate research, the Laureates are credited with laying the foundation for the current understanding of asset prices, the Royal Swedish Academy notes. “It relies in part of fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions,” according to the Nobel announcement.
Fama and Hansen join more than two dozen scholars associated with Chicago Booth that have been awarded the Nobel, the university reported. The three professors will share the approximately $1.24 million in prize money.
Learn more about the winners of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013.