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Eugene Fama
USINFO | 2013-11-20 14:56
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Nobel Memorial Prize in Economics 2013 Laureate
Eugene Francis "Gene" Fama
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| Born |
February 14, 1939 (age 74) Boston, Massachusetts |
| Nationality | American |
| Institution | University of Chicago |
| Field | Financial economics |
| Alma mater |
Tufts University University of Chicago |
| Influences | Merton Miller |
| Contributions |
Fama–French three-factor model Efficient market hypothesis |
| Awards |
2005 Deutsche Bank Prize in Financial Economics 2008 Morgan Stanley-American Finance Association Award Nobel Memorial Prize in Economics (2013) |
He is currently Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. In 2013 it was announced that he would be awarded the Nobel Memorial Prize in Economic Sciences jointly with Robert Shiller and Lars Peter Hansen.
Early Life
Fama was born in Boston, Massachusetts, the son of Angelina (née Sarraceno) and Francis Fama. All of his grandparents were immigrants from Italy. Fama is a Malden Catholic High School Athletic Hall of Fame honoree. He earned his undergraduate degree in economics magna cum laude in 1960 from Tufts University where he was also selected as the school’s outstanding student-athlete.
Career
His M.B.A. and Ph.D. came from the Booth School of Business at the University of Chicago in economics and finance. His doctoral supervisors were Nobel prize winner Merton Miller and Harry Roberts, but Benoit Mandelbrot was also an important influence. He has spent all of his teaching career at the University of Chicago.
His Ph.D. thesis, which concluded that stock price movements are unpredictable and follow a random walk, was published in January, 1965 issue of the Journal of Business, entitled "The Behavior of Stock Market Prices". That work was subsequently rewritten into a less technical article, "Random Walks In Stock Market Prices",which was published in the Financial Analysts Journal in 1965 and Institutional Investor in 1968.
His article "The Adjustment of Stock Prices to New Information" in the International Economic Review, 1969 (with several co-authors) was the first event study that sought to analyze how stock prices respond to an event, using price data from the newly available CRSP database. This was the first of literally hundreds of such published studies.
In 2013, he won the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, colloquially called the Nobel Prize in Economics.
Efficient market hypothesis
Fama is most often thought of as the father of the efficient-market hypothesis, beginning with his Ph.D. thesis. In a ground-breaking article in the May, 1970 issue of the Journal of Finance, entitled "Efficient Capital Markets: A Review of Theory and Empirical Work," Fama proposed two crucial concepts that have defined the conversation on efficient markets ever since. First, Fama proposed three types of efficiency: (i) strong-form; (ii) semi-strong form; and (iii) weak efficiency. They are explained in the context of what information sets are factored in price trend. In weak form efficiency the information set is just historical prices, which can be predicted from historical price trend; thus, it is impossible to profit from it. Semi-strong form requires that all public information is reflected in prices already, such as companies' announcements or annual earnings figures. Finally, the strong-form concerns all information sets, including private information, are incorporated in price trend; it states no monopolistic information can entail profits, in other words, insider trading cannot make a profit in the strong-form market efficiency world. Second, Fama demonstrated that the notion of market efficiency could not be rejected without an accompanying rejection of the model of market equilibrium (e.g. the price setting mechanism). This concept, known as the "joint hypothesis problem," has ever since vexed researchers. Market efficiency denotes how information is factored in price, Fama (1970) emphasizes that the hypothesis of market efficiency must be tested in the context of expected returns. The joint hypothesis problem states that when a model yields a predicted return significantly different from the actual return, one can never be certain if there exists an imperfection in the model or if the market is inefficient. Researchers can only modify their models by adding different factors to eliminate any anomalies, in hopes of fully explaining the return within the model. The anomaly, also known as alpha in the modeling test, thus functions as a signal to the model maker whether it can perfectly predict returns by the factors in the model. However, as long as there exists an alpha, neither the conclusion of a flawed model nor market inefficiency can be drawn according to the Joint Hypothesis. Fama (1991) also stresses that market efficiency per se is not testable and can only be tested jointly with some model of equilibrium, i.e. an asset-pricing model.
Fama–French three-factor model
Main article: Fama–French three-factor model
In recent years, Fama has become controversial again, for a series of papers, co-written with Kenneth French, that cast doubt on the validity of the Capital Asset Pricing Model (CAPM), which posits that a stock's beta alone should explain its average return. These papers describe two factors above and beyond a stock's market beta which can explain differences in stock returns: market capitalization and "value". They also offer evidence that a variety of patterns in average returns, often labeled as "anomalies" in past work, can be explained with their Fama–French three-factor model.
