For their work in laying “the foundation for the current understanding of asset prices,” the Nobel Prize in Economic Sciences was awarded Monday to Robert Shiller of Yale University, and Lars Peter Hansen and Eugene Fama, both of the University of Chicago.
In addition to having complementary economic theories that help us understand financial market pricing in general, the three men also share a connection to CME Group. Each has received awards from the CME Group Center for Innovation (CFI) for their ideas – Shiller for the 2012 CME Group-MSRI Prize, Hansen for the same award in 2008, and Fama for the Melamed-Arditti Innovation award in 2007. CME Group Chairman Emeritus Leo Melamed, who is Vice Chairman of the Competitive Markets Advisory Council, which oversees the CFI, noted the connection in his congratulations to the trio:
“It is with a large measure of pride that we at CME Group offer congratulations to the three new Nobel Laureates in Economics, Robert Shiller, Lars Peter Hansen, and Eugene Fama. They are highly deserving of this foremost honor and well-known to our market community. Each had been previously chosen by CMEG for Center for Innovation Awards. Our heartfelt and proud applause.”
While the CFI awarded Fama, Hansen and Shiller for their widespread theoretical and practical contributions to financial markets, it is their work on asset pricing that links them.
Read More: MSRI Prize: Robert Shiller Keeps Innovating
All three have contributed in some way to how we understand the movement of asset prices, mainly stocks, over time. Fama’s research in the 1960s led to his efficient markets hypothesis, which suggests that it’s nearly impossible to predict asset prices in the short term because the market responds to news and information rapidly. Shiller added to this research – some say he contradicted it – by finding that prices in the long term are easier to track because they correspond to price-dividend ratios. Hansen, meanwhile, developed the generalized method of moments, something the Nobel committee called “particularly well-suited to testing rational theories of asset pricing,” and upon which most recent research on asset pricing has been based.
In his Monday morning phone call with Nobelprize.org, Fama described how this study of pricing relates to risk:
“For this particular area, it’s really the idea of how do you measure risk. If the market is pricing things correctly, what is the relation between the expected return – which is the compensation for risk – and risk?”
Fama and Hansen also continue a tradition for the University of Chicago as the 11th and 12th current or former faculty members in economics to be awarded the Nobel. In his discussion with Nobelprize.org, Hansen talked about why he thinks he and several colleagues have been recognized:
“It’s a few things. It’s certainly having such a distinguished faculty set great examples for me. A lot of my colleagues have been people with very broad interests in economics, not just narrowly focused interests, and really convinced that economics will explain stuff, to understand the real world better. It’s not just some intellectual game, and completely committed to that type of mentality.”
The study of asset pricing is certainly economics that helps explain how the real world works. By awarding these three perennial candidates for the prize, the Nobel committee seems committed to rewarding ideas that apply to both investors and markets.
The MSRI Prize, which now shares three alumni with the Nobel in Economics, will be awarded October 21.