Research on Financial Markets Recognized for Nobel Prize in Economics

Robert Shiller, co-creator of the Case-Shiller home price index, is one of three Americans to be awarded the 2013 Nobel Prize in economics. The committee recognized Robert J. Shiller (Yale University), Eugene F. Fama (University of Chicago), and Lars Peter Hansen (University of Chicago) for the empirical analysis of asset prices.

Their individual works helped improve our understanding of asset markets and the tendency of asset prices to be very difficult to predict in the short-run but even less so in the long-run. Shiller’s contribution was to examine the relationship between stock prices and corporate dividends.

The analysis recognized by the committee undoubtedly informed Shiller’s later work on housing and asset bubbles. Shiller co-developed the Case-Shiller home price index in part to provide the housing market with a better indicator of short and long-run conditions. The index created is widely viewed as the leading measure of U.S. residential real estate prices.

In addition, Shiller famously warned of Irrational Exuberance in the run-up of internet stock prices in the late 1990s and provided similar warnings for the housing market in the 2000s. Irrational exuberance is the heightened state of investor enthusiasm not supported by market fundamentals in the long-run.

The contribution of Fama was to demonstrate that in the short-run stock prices were difficult to predict and prices quickly incorporated new information. Hansen developed a statistical method to test these and other rational theories of asset prices.

The three laureates will share the prize of 8 million Swedish crown or $1.25 million. The Nobel Prize award ceremony will be held December 10, 2013.

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