Work on asset prices wins economics Nobel for trio

• The ability to predict prices of stocks and bonds got three Americans the 2013 Nobel prize for economics on oct 14 2013
•  The Royal Swedish Academy of Sciences (RSAS) said the award was given to Eugene Fama, Lars Peter Hansen from the University of Chicago and Yale University’s 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 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 linked to these savings.
• Asset prices are also of fundamental importance to the macro economy, as they provide crucial information for economic decisions of consumption and investments in physical capital, such as buildings, machinery.
• Mispricing of assets may contribute to financial crises and, as the 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.
•  Shiller said getting the Nobel was a total surprise. “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 said, adding that finance drives modern civilization.
•   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.
• Hansen developed a statistical method that is particularly well suited to testing rational theories of asset pricing.