Oct 14, 2013
06:12 AM
The Connecticut Story

Yale Professor Robert J. Shiller Shares Nobel Prize for Economics (See Our 2011 Interview)

Yale Professor Robert J. Shiller Shares Nobel Prize for Economics (See Our 2011 Interview)

Michael Marsland, Yale University

Robert J. Shiller.

Robert J. Shiller, the Sterling Professor of Economics at  Yale University, who quantified how the prices of stocks, bonds and other assets can be predicted over the course of several years--if not in the short term--and who had predicted what would happen when the U.S. housing bubble popped, is one of three to share the Nobel Prize for Economics.

The Royal Swedish Academy of Sciences announced that it has awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2013 to Shiller, and Eugene F. Fama Lars Peter Hansen, both of the University of Chicago "for their empirical analysis of asset prices.”

See our 2011 Connecticut Magazine interview with Shiller about his prediction of bursting of the housing bubble and the economic crisis that followed.

"There is no way to predict the price of stocks and bonds over the next few days or weeks," said the press release announcing the winners of the Nobel Prize in Economics. "But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller."

"Beginning in the 1960s, Eugene Fama and several collaborators demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices," the release said. "These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example."

The release continued:

"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. He found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets.

"One approach interprets these findings in terms of the response by rational investors to uncertainty in prices. High future returns are then viewed as compensation for holding risky assets during unusually risky times. Lars Peter Hansen developed a statistical method that is particularly well suited to testing rational theories of asset pricing. Using this method, Hansen and other researchers have found that modifications of these theories go a long way toward explaining asset prices.

"Another approach focuses on departures from rational investor behavior. So-called behavioral finance takes into account institutional restrictions, such as borrowing limits, which prevent smart investors from trading against any mispricing in the market.

"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 Nobel committees have now announced all six of the annual $1.2 million awards for 2013, an Associated Press story said, adding, that the economics award is not a Nobel Prize in the same sense as the medicine, chemistry, physics, literature and peace prizes, which were created by Swedish industrialist Alfred Nobel in 1895.

Sweden’s central bank added the economics prize in 1968 as a memorial to Nobel, AP said.


Yale Professor Robert J. Shiller Shares Nobel Prize for Economics (See Our 2011 Interview)

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