Making Empirical Asset Pricing Coherent

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John Y. Campbell’s paper argues that empirical asset pricing is a coherent enterprise, which owes much to the laureates’ seminal contributions, and that important themes in the literature can best be understood by considering the laureates in pairs.

The 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, awarded for empirical analysis of asset prices, was unforgettably exciting for financial economists. The 2013 laureates, Eugene Fama, Lars Peter Hansen, and Robert Shiller, are giants of ?finance and architects of the intellectual structure within which all contemporary research in asset pricing is conducted.

The fame of the laureates extends far beyond ?financial economics. Eugene Fama is one of the world?s most cited economists in any field. Lars Peter Hansen is an immensely distinguished econometrician, so the ?eld of econometrics naturally claims a share of his Nobel glory. Robert Shiller is a founder of behavioral economics, a creator of the Case-Shiller house price indexes, and the author of important and widely read books for a general audience.

The 2013 prize attracted attention in the media, and stimulated discussion among economists, for two additional reasons. First, the behavior of asset prices interests every investor, including every individual saving for retirement, and is a core concern for the ?financial services industry. Second, the laureates have interpreted asset price movements in strikingly different ways. Robert Shiller is famous for his writings on asset price bubbles, and his public statements that stocks in the late 1990s and houses in the mid 2000s had become overvalued as the result of such bubbles. Eugene Fama is skeptical that the term “bubble” is a well defined or useful one. More broadly, Fama believes that asset price movements can be understood using economic models with rational investors, whereas Shiller does not.

The purpose of this article is to celebrate the 2013 Nobel Memorial Prize in Economic Sciences, and to explain the achievements of the laureates in a way that brings out the connections among them. I hope to be able to communicate the intellectual coherence of the award, notwithstanding the differing views of the laureates on some unsettled questions.

I should say a few words about my own connections with the laureates. Robert Shiller changed my life when he became my PhD dissertation adviser at Yale in the early 1980s. In the course of my career I have written 12 papers with him, the earliest in 1983 and the most recent (hopefully not the last) in 2009. Eugene Fama, the oldest of the 2013 laureates, was already a legend over 30 years ago, and his research on market efficiency was intensively discussed in New Haven and every other center of academic economics. I first met Lars Peter Hansen when I visited Chicago while seeking my first academic job in 1984. I have never forgotten the first conversation I had with him about financial econometrics, in which I sensed his penetrating insight that would require effort to fully understand but would amply reward the undertaking.

Among financial economists, I am not unusual in these feelings of strong connection with the 2013 Nobel laureates. The 2013 award ceremony in Stockholm was notable for the celebratory atmosphere among the coauthors and students of the laureates who were present, including academics Karl Case, John Cochrane, Kenneth French, John Heaton, Ravi Jagannathan, Jeremy Siegel, and Amir Yaron, central banker Narayana Kocherlakota, and asset management practitioners David Booth, Andrea Frazzini, and Antti Ilmanen. Any of them could write a similar article to this one, although of course the views expressed here are my own and are probably not fully shared by any other economists including the Nobel laureates themselves.

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