Comment on Open Thread, November 1 - 7, 2013

Mon, 04 Nov 2013 21:33:19 GMT

Ugh. The prize was first and foremost in recognition of Fama, Shiller, and Hansen's empiricism in finance. In the sixties, Fama proposed a model of efficient markets, and it held up to testing. Later, both Fama, Shiller, and Hansen showed further tests didn't hold up. Their mutual conclusion: the efficient market hypothesis is mostly right, and while there is no short-term predictability based on publicly available information, there is some long-term predictability. Since the result is fairly messy, Fama and Shiller have differences about what they emphasize (and are both over-rhetorical in their emphasis). Does "mostly right" mean false or basically true?

What's causing the remaining lack of agreement, especially over bubbles? Lack of data. Shiller thinks bubbles exist, but are rare enough he can't solidly establish them, while Fama is unconvinced. Fama and Shiller have done path-breaking scientific work, even if the story about asset price fluctuation isn't 100% settled.

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