EC Macroeconomic Theory Supplement 11 Professor Sanjay Chugh

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1 Department of Economics Boston College EC Macroeconomic Theory Supplement 11 Professor Sanjay Chugh The Nobel Prize in Economics was awarded on Monday, October 14, 2013 to Eugene Fama (University of Chicago), Lars Peter Hansen (University of Chicago), and to Robert Shiller (Yale University). They were awarded the prize for their theoretical and empirical contributions to financial market behavior, in particular for the short-run and long-run connections between stock market prices and bond market prices. The following short Wall Street Journal website piece briefly describes their contributions. Macroeconomic Theory Sanjay K. Chugh 1

2 WALL STREET JOURNAL OCTOBET 14, 2013 Americans Win Economics Nobel For Market Insights Scholars Fama, Hansen and Shiller Share Award By BRENDA CRONIN Updated Oct. 14, :16 p.m. ET Three American scholars won the Nobel Prize in economics for pioneering work in financial markets that has transformed portfolio management and asset pricing and launched the study of how emotions affect investment decisions. Americans Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller won the Nobel prize for economics. Brenda Cronin joins MoneyBeat to discuss their legacy. The Royal Swedish Academy of Sciences on Monday honored Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University, citing their complementary but independent breakthroughs on "empirical analysis of asset prices." The laureates focused on how prices are set for stocks and bonds but their findings have implications far beyond financial markets. Every corner of the macroeconomy is affected by the risk tolerance as well as rational and irrational acts that spur individuals and corporations to invest or save. Macroeconomic Theory Sanjay K. Chugh 2

"Nobody's scratching their heads over this one. They've all been on the short list for many years," said Mark Gertler, a New York University economist currently on sabbatical at Columbia University.

" University of Chicago professor Lars Peter Hansen is congratulated by friends outside a coffee shop near his home after learning he had won the Nobel Prize in Economic Sciences on Monday in

Getty Images University of Chicago professor Eugene Fama prepares to leave home to teach his morning class after learning he had won the Nobel Prize in Economic Sciences on Monday in Getty Images

3 "Nobody's scratching their heads over this one. They've all been on the short list for many years," said Mark Gertler, a New York University economist currently on sabbatical at Columbia University. "The interesting thing is how the three are connected." University of Chicago professor Lars Peter Hansen is congratulated by friends outside a coffee shop near his home after learning he had won the Nobel Prize in Economic Sciences on Monday in Chicago, Ill. Getty Images University of Chicago professor Eugene Fama prepares to leave home to teach his morning class after learning he had won the Nobel Prize in Economic Sciences on Monday in Chicago, Ill. Getty Images Robert Shiller, one of three American scientists who won the 2013 economics Nobel prize, speaks on the phone at his home in New Haven, Conn. on Monday.REUTERS The 74-year-old Mr. Fama is seen by many as the father of modern finance, for his 1960s-era work on the theory of efficient markets. After meeting with little success in stock picking, Mr. Fama found that markets were efficient in a day-to-day or month-to-month time frame. They absorbed the latest information swiftly and seamlessly and yielded accurate asset prices. The conclusion upended notions of trying to profit from timing the market or stock picking and gave rise to the index-funds industry. Macroeconomic Theory Sanjay K. Chugh 3

4 Twenty years later, Mr. Shiller found that markets' short-term efficiency was less enduring over longer periods. He examined why asset prices were too volatile to be justified by fundamental information, such as dividends. In spans of three to five years, prices moved for a host of reasons, such as investors' risk aversion or their optimism or pessimism. The field of behavioral economics was born as scholars attempted to tease out what was behind investors' shifting risk tolerances and decisions. At the same time, Mr. Hansen was working on questions about market predictability, and came up with a tool for studying changes in asset pricing. That led to his Generalized Method of Moments an econometric tool that today is a standard economics theorem, applicable throughout the field and not just to financial markets. Mr. Hansen's theorem is "absolutely spectacular," said John Cochrane, a professor at the University of Chicago Booth School of Business. "It looks really complicated but he's kind of taken it to another dimension and seen how gloriously simple it is." At 60, Mr. Hansen is the youngest of Monday's winners. "I've been feeling old recently," he said. "But this gives me the feeling of being young." He said his work on the theorem dates back to when he was a graduate student and starting out as a professor-and being mentored by 2011 Nobelists, Thomas Sargent and Christopher Sims. Mr. Cochrane, who is Mr. Fama's son-in-law as well as his colleague, said Monday that after hearing from the Nobel prize panel, his father-in-law resumed his regular routine, teaching a class Monday at Chicago, his professional home of 54 years. Although Mr. Fama has exchanged tennis and windsurfing for golf, he doesn't show any signs of slowing his pace, Mr. Cochrane said. Mr. Shiller, 67, is one of the creators of the Standard & Poor's/Case-Shiller Home Price Index, which tracks changes in residential values across the U.S. At a news conference Monday in New Haven, Mr. Shiller said many fields, including law, sociology and history had informed his scholarship and that his wife, a psychologist, had "shaped my work in a fundamental way." Mr. Shiller is at work on another book with George Akerlof, who shared the 2001 Nobel and is married to Janet Yellen, the nominee to succeed Ben Bernanke as Federal Reserve chief. The work, which is about the shortcomings of capitalism and market economics, is likely to be published next year. The authors' previous book was "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism." Macroeconomic Theory Sanjay K. Chugh 4

5 Mr. Shiller said that after being notified early Monday morning by the prize committee, he telephoned his brother in Detroit. "Did you hear the news?" he asked. His brother replied: "The Tigers lost." Monday's awards add three more U.S.-based experts to this year's Nobel recipients. A week ago, three U.S.-based scientists won the Nobel Prize in medicine; two days later, three U.S.- based scientists won in chemistry. Niclas Rolander contributed to this article. Write to Brenda Cronin at brenda.cronin@wsj.com Macroeconomic Theory Sanjay K. Chugh 5

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