The Choice of the Nobel Committee – Financial Economics

The 2013 Nobel Prize was shared by Eugene Fama, Lars Peter Hansen (both from the Chicago University) and Robert Shiller (the Yale University) for their financial assets research.  Actually, the Nobel Committee distinguished the entire development of financial economics from its inception in the 1960s to the present day.

Fama was one of those who tried to integrate individual components into the entire pattern. Before Foma, finances were not in the economic mainstream. It is true that Harry Markowitz defended a thesis at the Chicago University in which the main guidelines of the portfolio theory were formulated. However, his main opponent was Milton Friedman who believed that the work on diversification of the assets portfolio was a mathematical exercise without an economic content. Only in the early 1960s, Markowitz’s followers -- Sharp and Lintner – applied his logic in the equilibrium model of evaluation of financial assets.  Fama went further and formulated a thesis of efficient markets. In his opinion, prices on financial assets reflect the available information. It is impossible to predict the movement of markets as the information becomes available in the market quite by chance: “It is possible to say that prices went down and there was a bubble in the market only after it has happened”.

Fama’s ideas gave an impetus to development of financial economics. Definitions of risk factors, active or passive asset management and market monitoring of asset managers are directly or indirectly related to the thesis of an effective market.

Lars Hansen was one of those who developed an econometric instrument of financial economics. Without his research, one cannot imagine either modern work on assets evaluation, or the work on empirical corporate finances. Behavioral models developed by Lars Hansen permitted to give a modern estimate of financial asset pricing models. Lars Hansen’s ideas helped introduce the definition of endogeneity in the lexicon of corporate finance researchers.

In his work in the 1980s, Robert Shiller asked a simple question: if prices are just a reflection of changes in dividends, why are they so volatile? He was the first to ask to what extent participants in the economic exchange were irrational and to what extent psychology had an effect on the behavior of agents and, consequently, on financial markets. Robert Shiller researched extensively applied issues, for example, in what way households can be protected from one of the greatest risks – the risk of real property prices.  Works by Case and Shiller, as well as the well-known Case-Shiller index dealt with that issue.

The Nobel –2013 traces back the development of financial economics from a small applied subsection of banking to mature science. Hope, it is not the last prize in financial economics!

Andrei Simonov,  Head of the Department of Empirical Research in Investments and Financial Markets