understanding the economics nobel prize 2013 lasse heje pedersen
TRANSCRIPT
Understanding the Economics Nobel Prize 2013
Lasse Heje Pedersen
Economics Nobel 2013
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013 was awarded jointly to
Eugene Fama Lars Peter Hansen Robert Shiller
“for their empirical analysis of asset prices”
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The Nobel Events
October: the phone calls
December: Swedish king awards the medal
Gala dinner
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Market Efficiency Fight
4
Efficient! Inefficient!
I’m just testing..
NB: The “quotes” in this presentation are made up to illustrate the debate, they are not literal quotes
market efficient if prices �always `fully reflect’ available � �
information
See also Asness and Liew, “The Great Divide over Market Efficiency”http://www.institutionalinvestor.com/Article/3315202/Asset-Management-Equities/The-Great-Divide-over-Market-Efficiency.html
Market Efficiency: Random Walk?
Prices: , where k is a constant required return Returns: i.e., random walk with drift k
Test: Stock split evidence looks like random walk– Event study methodology developed by Fama, Fisher, Jensen, and Roll (1969)
– But “post earnings announcement drift” and drift in other events
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Prices Vary Too Much for Random Walk and Mean-Revert
Shiller: Excess volatility of market prices– Prices appear to bounce around more than earnings– Price-earnings ratio varies significantly (average = 16.5)
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Prices Vary Too Much for Random Walk and Mean-Revert
Dividend yield varies and high D/P appears to predict high future returns– Regressing yields
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If Not Random Walk, then What?
The expected return varies over time– Prices , where is a pricing kernel, e.g. – Returns or
Why does the expected return (i.e., the risk premium) vary?
The Believer The “Atheist” The Agnostic
the risk premium is naturally high in
recessions, plus its measured with error
No, it’s because people make
mistakes and suffer behavioral biases
My GMM method can test this stuff. I reject standard consumption-based asset
pricing models, but …
low high low is messed up
Joint Hypothesis Problem
Joint hypothesis problem: – Any rejection of a model of the risk premium and market efficiency means– One of them is wrong, but not necessarily both
Rejection of the joint hypothesis means:
The Believer The “Atheist” The Agnostic
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the model of the risk premium is wrong and the market is efficient market efficiency is
wrong
I can reject any model - but is it wrong in
important or unimportant ways?
Bubbles
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I called the internet bubble
Dude - you called it way
early
December 3, 1996
Relative to “post bubble”: Mkt went up 19% but underperformed Rf=30%
Bubbles
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I called the housing bubble
Dude - you called it early
again
Early 2003
Relative to “post bubble”: Prices went down ~7%, but must consider9 years housing services and Rf = 17%
Bubbles
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Dude – you trade on it every day
with DFA
You cannot trade on this “bubble”
nonsense
Conclusion: Financial Economics Has Had Huge Real-World Impact
Market efficiency– Very useful idea with broad implications – cf. Darwin’s survival of the fittest – Focus on diversification and low fees– E.g., index funds
Behavioral finance– Focus on how people actually make decision– You can nudge people to make better decisions– E.g. by having a good default: save for retirement
Empirical tests– Decisions and knowledge should be based on rigorously tested facts– Important to understand data mining biases
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