Friday, October 18, 2013

U of Chicago on Fama and Hansen

The following is a report by U of Chicago:

Fama’s work demonstrated that new information is very quickly incorporated into the market, making it difficult to predict short-term changes in asset prices. Hansen developed a statistical method for testing rational theories of asset pricing like those advanced by Fama and Shiller.

They are among the 89 scholars associated with the University to receive Nobels, and among the 28 who have received the Nobel Memorial Prize in Economics. 

Hansen’s “powerful, pioneering” methods for assessing economic models have been adopted by social scientists in many fields, said List, the Homer J. Livingston Professor and chair of Economics. “Whether it is to explore how public policies effect unemployment rates, how networks form, or how environmental regulations influence productivity growth, Lars’ work plays a key role.”

Fama’s early work on efficient markets, which gave rise to the index funds many investors participate in today, not only revolutionized academic finance, but also made “a phenomenal impact on the practical world, and really on people’s lives,” said John Heaton, the Joseph L. Gidwitz Professor of Finance and Deputy Dean for Faculty at Chicago Booth.

Fama coined the term “efficient market” and the term gained widespread use following publication of “Efficient Capital Markets: A Review of Theory and Empirical Work” in the Journal of Finance in 1970. The efficient markets hypothesis holds that, as a result of competition, equilibrium prices in financial markets incorporate all relevant information.

Hansen’s research looks at ways to bridge the gap between economic models and economic and financial data. His work has led to improved methods for formulating, analyzing and testing dynamic economic models in environments with uncertainty. He has applied these methods to study the determinants of consumption, savings and security market prices.

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