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Understanding Asset Prices

The Royal Swedish Academy of Sciences, Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013, Understanding Asset Prices, here.

9. Conclusions
Eugene Fama, Lars Peter Hansen, and Robert Shiller have developed empirical methods and used these methods to reach important and lasting insights about the determination of asset prices. Their methods have shaped subsequent research in the field and their findings have been highly influential both academically and practically. The waves of research following the original contributions of the Laureates constitute a landmark example of highly fruitful interplay between theoretical and empirical work.
We now know that asset prices are very hard to predict over short time horizons, but that they follow movements over longer horizons that, on average, can be forecasted. We also know more about the determinants of the cross-section of returns on different assets. New factors – in particular the book-to-market value and the price-earnings ratio – have been demonstrated to add significantly to the prior understanding of returns based on the standard CAPM. Building on these findings, subsequent research has further investigated how asset prices are fundamentally determined by risk and attitudes toward risk, as well as behavioral factors.

Marginal Revolution, Hansen, Hansen, Shiller, Shiller, Fama, Fama.

John Cochrane, Gene Fama’s Nobel Prize, here.

Though literally hundreds of multiple-factor models have been published, the Fama-French three-factor model quickly has become the standard basis for comparison of new models, for risk-adjustment in practice, and it is the summary of the facts that the current generation of theorists aims at. It has replaced the CAPM as the baseline model. Any researcher chasing down an anomaly today first checks whether anomalously high returns are real, and then checks whether they are consistent the CAPM and the Fama-French three factor model. No other asset pricing model enjoys this status.

 

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