The Royal Swedish Academy of Sciences (RSAS) announced Nobel prize in economics in 2013 to Eugene Fama, Lars Peter Hansen from the University of Chicago and Yale Universitys Robert J Shiller for these predictions. There is no way to predict price of stocks and bonds over days or weeks. But it is possible to foresee the broad course of these prices over longer periods -- three to five years. RSAS said the laureates made and analyzed these findings. The behaviour of asset prices is essential for many important decisions, not only for professional investors but also for most people in their daily lives. The choices on how to save - in form of cash, bank deposits or stocks - depend on what one thinks of the risks and returns associated with these forms of saving. Asset prices are also of fundamental importance to the macro economy, as they provide crucial information for key economic decisions regarding consumption and investments in physical capital, such as buildings and machinery. Mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy. Today, the field of empirical asset pricing is one of the largest and most active subfields in economics. Professor Shilling said getting the Nobel was complete disbelief. Economics is a fascinating and important field. Finance is a theory that has many controversial elements and a vast body of knowledge, use of which will help improve human welfare. He added finance drives modern civilization. Our best activities have to be financed. I want to see finance develop further to serve human kind. Shilling said the recent financial crisis reflected mistakes and imperfections in the financial system that they were working on correcting. It will take decades. We have gone through financial crisis many times in history and have generally learnt from them. Fama started looking at asset prices in the 1960s and demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings changed market practice. Shiller in the early 1980s found stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets, the Academy said. 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. Hansen developed a statistical method that is particularly well suited to testing rational theories of asset pricing.
Posted on: Wed, 16 Oct 2013 04:58:11 +0000
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