2013 Nobel Prize: Empirical analysis of asset prices rewarded (Fama, Hansen, Shiller)
The 2013 Nobel Prize was awarded to two economists from the University of Chicago, Eugene Fama and Lars Peter Hansen, and to Robert J. Shiller from Yale University, for their contributions to « empirical analysis of asset prices. » Their work has mainly sought to explain price formation in financial markets, demonstrating in particular that models for forecasting short-term financial asset prices produce insignificant results.
The market efficiency model was born out of a hypothesis put forward by Eugene Fama in « Efficient Capital Markets, a Review of Theory and Empirical Work, » published in the Journal of Finance in 1970. According to this theory, all available information is reflected in the price of the asset, which is the discounted sum of expected cash flows. Fama therefore suggests that efficiency requires a high degree of atomicity among market participants, who react correctly and almost immediately to information, without any possibility of speculation. Eugene Fama identifies three forms of efficiency:
– Efficiency is weak when the only information available on the markets is historical prices;
– Semi-strong efficiency is based on public information from an issuing company (annual report, press release, distribution of bonus shares, press articles, earnings announcements, etc.).
– Efficiency is strong when even private information is taken into account in the actions of agents.
This model led to the establishment of the Capital Asset Pricing Model (CAPM). It was subsequently challenged by behavioral finance and by several economists, including Grossman and Stiglitz, who showed that acquiring information involves a cost that would not exist if it were simply possible to observe asset prices.
Robert Shiller has partly challenged some of Fama’s conclusions . Indeed, his famous contribution » Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends? » (NBER) reveals the presence of price volatility in the markets that is greater than would have been observed solely by changes in dividend expectations and fundamental values.
Finally, Lars Peter Hansen contributed to the introduction of generalized moments econometric methods in financial asset equilibrium models (MEDAF). His work made it possible to empirically test models introducing consumer behavior (CCAPM – Consumption Capital Asset Pricing) to justify that short-term financial asset price forecasting models produced insignificant results.
N.P. and A.J.
