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CIC Faculty Win Nobel Prize in Economics

CIC Faculty Win Nobel Prize in Economics

CIC Faculty Win Nobel Prize in Economics

Oct 14, 2013, 13:29 PM

Eugene F. Fama, the Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, and Lars Peter Hansen, the David Rockefeller Distinguished Service Professor at the University of Chicago, have been awarded the 2013 Nobel Prize in Economic Sciences for their work in the empirical analysis of asset prices.



, the Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, and , the David Rockefeller Distinguished Service Professor at the University of Chicago, have been awarded the 2013 Nobel Prize in Economic Sciences for their work in the empirical analysis of asset prices.  They share the award with Robert J. Schiller of Yale University.

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.

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.

According to the Royal Swedish Academy of Sciences, "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."

For more on the work of Eugene Fama and Lars Peter Hansen, please visit .