The Nobel Prize for economic sciences went to “three American scientists” for their work improving the “forecasting of long-term asset prices,” reports Fin24
. This is particularly topical due to the bursting of the “US housing market bubble,” which led to “global financial meltdown”.
The awarding committee honoured Eugene Fama, Lars Peter Hansen and Robert Shiller for their “empirical analysis of asset prices," notes the BBC
. The awarding committee said their work “had laid the foundation for the current understanding of asset prices”.
“Their work spans almost 50 years of research,” reports Bloomberg
. Mr Fama kicked off showing “that it’s difficult to predict price movements in the short run”. This led to the belief that “financial markets are efficient”. Index funds exist down to this belief.
Spotting the bubble before it bursts
They concluded that a “better understanding of what drives prices over the long term can make markets function better,” says Fin24
. And if investors fail to notice “when rising asset prices become detached from underlying fundamentals [it] can create bubbles”.
The three economists will share the 8 million Swedish krona prize, says the BBC
. That works out at about R12 million.
Mr Shiller's research showed him when the “US housing market” was over heating before the bubble burst, says Fin24
. He is concerned about the state of the current US housing market, also citing that it may be over-heating at the moment.
Mr Hansen is honoured for his “development of a statistical method that was able to test theories on asset pricing,” adds the BBC
. Mr Fama and Mr Hansen are both of the University of Chicago, Mr Shiller is of Yale University.
Let's hope there are no imminent damaging bubbles.