Americans Win Nobel Prize for Asset Price Forecasts

Three Americans – Robert Shiller, Eugene Fama and Lars Peter Hansen -- were awarded the 2013 Nobel Prize in economics on Monday for their influential work in predicting the future prices of assets such as stocks.

Shiller, a Yale University professor and frequent guest on FOX Business, is a co-creator of the widely-watched S&P/Case-Shiller home price index that gauges housing prices in 20 large U.S. cities. Fama and Hansen are both professors at the University of Chicago.

“Fama, Hansen, and Shiller have developed new methods for studying asset prices and used them in their investigations of detailed data on the prices of stocks, bonds and other assets. Their methods have become standard tools in academic research, and their insights provide guidance for the development of theory as well as for professional investment practice,” the Royal Swedish Academy of Sciences, which awards Nobel Prizes, said in a statement.

The trajectories of asset prices have important “real world” implications, affecting everything from how consumers buy their homes to the formation of government fiscal policy.

Fama is often referred to as the father of modern finance and has long been favored to win a Nobel.

Fama’s research beginning four decades ago showed that even professional investors are essentially helpless at predicting the short-term trajectory of stocks, and that playing the market as a whole is probably the safest long-term bet.

Those findings led to the emergence of stock-index funds comprised of groups of stocks that span a sector or the entire market, a fundamental shift in how Americans invest in stocks.

Vanguard’s S&P 500 fund index, launched in 1976, is the largest mutual fund in the world with current assets at $143 billion.

Shiller’s work in the 1980s, comparing companies’ stock prices to their dividends, dug deeper into the difficulties of predicting short-term stock trends. Unlike Fama, who believes markets act efficiently, Shiller thinks market imperfections will eventually lead to bubbles. He accurately predicted bubbles in both technology stocks in the 1990s and U.S. housing prices a decade later.

“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,” the award statement said. Shiller’s findings can also be applied to bonds and other assets, including home values.

Hansen, according to the Royal Swedish Academy of Sciences, developed a statistical method “particularly well suited to testing rational theories of asset pricing.”

“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,” the statement said.