Eugene Fama

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Eugene Fama
Eugene Fama at Nobel Prize, 2013.jpg
Fama in Stockholm, December 2013
Born (1939-02-14) February 14, 1939 (age 82)
Nationality American
Institution University of Chicago
Field Financial economics, Organizational economics, Macroeconomics
School or
Chicago School of Economics
Alma mater Tufts University
University of Chicago
Merton Miller
Harry V. Roberts
Cliff Asness, Myron Scholes, Mark Carhart
Contributions Fama–French three-factor model
Efficient-market hypothesis
Awards2005 Deutsche Bank Prize in Financial Economics
2008 Morgan Stanley-American Finance Association Award
Nobel Memorial Prize in Economics (2013)
Information at IDEAS / RePEc

Eugene Francis "Gene" Fama ( /ˈfɑːmə/ ; born February 14, 1939) is an American economist, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis.


He is currently Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. In 2013, he shared the Nobel Memorial Prize in Economic Sciences jointly with Robert J. Shiller and Lars Peter Hansen. [1] [2] The Research Papers in Economics project ranked him as the 9th-most influential economist of all-time based on his academic contributions, as of April 2019. [3] He is regarded as "the father of modern finance" as his works built the foundation of financial economics and they have been cited widely. [4]

Early life

Fama was born in Boston, Massachusetts, the son of Angelina (née Sarraceno) and Francis Fama. All of his grandparents were immigrants from Italy. [5] Fama is a Malden Catholic High School Athletic Hall of Fame honoree. He earned his undergraduate degree in Romance Languages magna cum laude in 1960 from Tufts University where he was also selected as the school’s outstanding student-athlete. [6]


His M.B.A. and Ph.D. came from the Booth School of Business at the University of Chicago in economics and finance. His doctoral supervisors were Nobel prize winner Merton Miller and Harry Roberts, but Benoit Mandelbrot was also an important influence. [7] He has spent all of his teaching career at the University of Chicago.

His Ph.D. thesis, which concluded that short-term stock price movements are unpredictable and approximate a random walk, was published in the January 1965 issue of the Journal of Business , entitled "The Behavior of Stock Market Prices". That work was subsequently rewritten into a less technical article, "Random Walks In Stock Market Prices", [8] which was published in the Financial Analysts Journal in 1965 and Institutional Investor in 1968. His later work with Kenneth French showed that predictability in expected stock returns can be explained by time-varying discount rates, for example higher average returns during recessions can be explained by a systematic increase in risk aversion which lowers prices and increases average returns. [9]

His article "The Adjustment of Stock Prices to New Information" in the International Economic Review , 1969 (with several co-authors) was the first event study that sought to analyze how stock prices respond to an event, using price data from the newly available CRSP database. This was the first of literally hundreds of such published studies.[ citation needed ]

In 2013, he won the Nobel Memorial Prize in Economic Sciences.

Efficient market hypothesis

Fama is most often thought of as the father of the efficient-market hypothesis, beginning with his Ph.D. thesis. In 1965 he published an analysis of the behaviour of stock market prices that showed that they exhibited so-called fat tail distribution properties, implying extreme movements were more common than predicted on the assumption of normality. [10] [11]

In an article in the May 1970 issue of the Journal of Finance , entitled "Efficient Capital Markets: A Review of Theory and Empirical Work", [12] Fama proposed two concepts that have been used on efficient markets ever since. First, Fama proposed three types of efficiency: (i) strong-form; (ii) semi-strong form; and (iii) weak efficiency. They are explained in the context of what information sets are factored in price trend. In weak form efficiency the information set is just historical prices, which can be predicted from historical price trend; thus, it is impossible to profit from it. Semi-strong form requires that all public information is reflected in prices already, such as companies' announcements or annual earnings figures. Finally, the strong-form concerns all information sets, including private information, are incorporated in price trend; it states no monopolistic information can entail profits, in other words, insider trading cannot make a profit in the strong-form market efficiency world. Second, Fama demonstrated that the notion of market efficiency could not be rejected without an accompanying rejection of the model of market equilibrium (e.g. the price setting mechanism). This concept, known as the "joint hypothesis problem", has ever since vexed researchers.[ citation needed ] Market efficiency denotes how information is factored in price, Fama (1970) emphasizes that the hypothesis of market efficiency must be tested in the context of expected returns. The joint hypothesis problem states that when a model yields a predicted return significantly different from the actual return, one can never be certain if there exists an imperfection in the model or if the market is inefficient. Researchers can only modify their models by adding different factors to eliminate any anomalies, in hopes of fully explaining the return within the model. The anomaly, also known as alpha in the modeling test, thus functions as a signal to the model maker whether it can perfectly predict returns by the factors in the model. However, as long as there exists an alpha, neither the conclusion of a flawed model nor market inefficiency can be drawn according to the Joint Hypothesis. Fama (1991) also stresses that market efficiency per se is not testable and can only be tested jointly with some model of equilibrium, i.e. an asset-pricing model.

Fama–French three-factor model

In recent years, Fama has become controversial again, for a series of papers, co-written with Kenneth French, that cast doubt on the validity of the Capital Asset Pricing Model (CAPM), which posits that a stock's beta alone should explain its average return. These papers describe two factors above and beyond a stock's market beta which can explain differences in stock returns: market capitalization and "value". They also offer evidence that a variety of patterns in average returns, often labeled as "anomalies" in past work, can be explained with their Fama–French three-factor model. [13]


Related Research Articles

Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital. It thus provides the theoretical underpinning for much of finance.

In finance, technical analysis is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the same tools of technical analysis, which, being an aspect of active management, stands in contradiction to much of modern portfolio theory. The efficacy of both technical and fundamental analysis is disputed by the efficient-market hypothesis, which states that stock market prices are essentially unpredictable, and research on whether technical analysis offers any benefit has produced mixed results. As such it has been described by many academics as pseudoscience.

Capital asset pricing model

In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio.

The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information.

Chicago school of economics

The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stigler are considered the leading scholars of the Chicago school.

A market anomaly in a financial market is predictability that seems to be inconsistent with theories of asset prices. Standard theories include the capital asset pricing model and the Fama-French Three Factor Model, but a lack of agreement among academics about the proper theory leads many to refer to anomalies without a reference to a benchmark theory. Indeed, many academics simply refer to anomalies as "return predictors", avoiding the problem of defining a benchmark theory.

The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus cannot be predicted.

Kenneth Ronald "Ken" French is the Roth Family Distinguished Professor of Finance at the Tuck School of Business, Dartmouth College. He has previously been a faculty member at MIT, the Yale School of Management, and the University of Chicago Booth School of Business. He is most famous for his work on asset pricing with Eugene Fama. They wrote a series of papers that cast doubt on the validity of the Capital Asset Pricing Model (CAPM), which posits that a stock's beta alone should explain its average return. These papers describe two factors above and beyond a stock's market beta which can explain differences in stock returns: market capitalization and "value". They also offer evidence that a variety of patterns in average returns, often labeled as "anomalies" in past work, can be explained with their Fama–French three-factor model.

Fundamentally based indexes are indices in which stocks are weighted by one of many economic fundamental factors, especially accounting figures which are commonly used when performing corporate valuation, or by a composite of several fundamental factors. A potential benefit with composite fundamental indices is that they might average out specific sector biases which may be the case when only using one fundamental factor. A key belief behind the fundamental index methodology is that underlying corporate accounting/valuation figures are more accurate estimators of a company's intrinsic value, rather than the listed market value of the company, i.e. that one should buy and sell companies in line with their accounting figures rather than according to their current market prices. In this sense fundamental indexing is linked to so-called fundamental analysis.

Financial market efficiency

There are several concepts of efficiency for a financial market. The most widely discussed is informational or price efficiency, which is a measure of how quickly and completely the price of a single asset reflects available information about the asset's value. Other concepts include functional/operational efficiency, which is inversely related to the costs that investors bear for making transactions, and allocative efficiency, which is a measure of how far a market channels funds from ultimate lenders to ultimate borrowers in such a way that the funds are used in the most productive manner.

Robert J. Shiller American economist (born 1946)

Robert James Shiller is an American economist, academic, and best-selling author. As of 2019, he serves as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center for Finance. Shiller has been a research associate of the National Bureau of Economic Research (NBER) since 1980, was vice president of the American Economic Association in 2005, its president-elect for 2016, and president of the Eastern Economic Association for 2006–2007. He is also the co‑founder and chief economist of the investment management firm MacroMarkets LLC.

The Fama–DFA Prize is an annual prize given to authors with the best capital markets and asset pricing research papers published in the Journal of Financial Economics. The award is named after Eugene Fama, who is a co-founding advisory editor of the journal, a financial economist who helped to develop the efficient-market hypothesis and random walk hypothesis in asset pricing, a 2013 Nobel laureate in Economics, a professor of finance at the Booth School of Business at the University of Chicago, and a research director for Dimensional Fund Advisors and the Center for Research in Securities Prices. The prize is also named for the investment advisory firm, Dimensional Fund Advisors.

Richard Roll is an American economist and professor of finance at UCLA, best known for his work on portfolio theory and asset pricing, both theoretical and empirical.

In finance, momentum is the empirically observed tendency for rising asset prices to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month. Momentum signals have been shown to be used by financial analysts in their buy and sell recommendations.

In asset pricing and portfolio management the Fama–French three-factor model is a model designed by Eugene Fama and Kenneth French to describe stock returns. Fama and French were professors at the University of Chicago Booth School of Business, where Fama still resides. In 2013, Fama shared the Nobel Memorial Prize in Economic Sciences. The three factors are (1) market risk, (2) the outperformance of small versus big companies, and (3) the outperformance of high book/market versus low book/market companies. However, the size and book/market ratio themselves are not in the model. For this reason, there is academic debate about the meaning of the last two factors.

A period of financial distress occurs when the price of a company or an asset or an index of a set of assets in a market is declining with the danger of a sudden crash of value occurring, either because the company is experiencing increasing problems of cash flow or a deteriorating credit balance or because the price had become too high as a result of a speculative bubble that has now peaked.

Low-volatility anomaly

In investing and finance, the low-volatility anomaly is the observation that low-volatility stocks have higher returns than high-volatility stocks in most markets studied. This is an example of a stock market anomaly since it contradicts the central prediction of many financial theories that taking higher risk must be compensated with higher returns.

The joint hypothesis problem is the problem that testing for market efficiency is difficult, or even impossible. Any attempts to test for market (in)efficiency must involve asset pricing models so that there are expected returns to compare to real returns. It is not possible to measure 'abnormal' returns without expected returns predicted by pricing models. Therefore, anomalous market returns may reflect market inefficiency, an inaccurate asset pricing model or both.

Factor investing is an investment approach that involves targeting quantifiable firm characteristics or “factors” that can explain differences in stock returns. Over the last fifty years, academic research has identified hundreds of potential factors that impact stock returns. Security characteristics that may be included in a factor-based approach include size, value, momentum, asset growth, profitability, leverage, term and carry.


  1. Eugene F. Fama on OOjs UI icon edit-ltr-progressive.svg , accessed 12 October 2020
  2. "3 US Economists Win Nobel for Work on Asset Prices", abc news, October 14, 2013
  3. "Economist Rankings at IDEAS – Top 10% Authors, as of April 2019". Research Papers in Economics. April 2019. Retrieved May 22, 2019.
  4. Eugene F. Fama personal website
  5. Colin Read, The Efficient Market Hypothesists: Bachelier, Samuelson, Fama, Ross, Tobin and Shiller, Palgrave Macmillan, 2012, p. 94
  6. Ritter, Karl; Rising, Malin (2013-10-14). "3 Americans win Nobel prize in economics". Boston Globe . Retrieved 2013-10-14.
  7. "Mathematics Genealogy Project". Retrieved 2013-10-14.
  8. Fama, Eugene F. (September–October 1965). "Random Walks In Stock Market Prices". Financial Analysts Journal. 21 (5): 55–59. CiteSeerX . doi:10.2469/faj.v21.n5.55.
  9. Fama and French (1988)
  10. "The behavior of stock-market prices." Journal of business (1965): 34-105
  11. "Q&A: Confidence in the Bell Curve" (an interview with Fama and French). March 18, 2009. Archived from the original on June 13, 2015.
  12. Malkiel, Burton G.; Fama, Eugene F. (1970). "Efficient capital markets: a review of theory and empirical work". The Journal of Finance. 25 (2): 383–417. doi:10.1111/j.1540-6261.1970.tb00518.x.
  13. Fama, Eugene F.; French, Kenneth R. (1993). "Common Risk Factors in the Returns on Stocks and Bonds". Journal of Financial Economics. 33 (1): 3–56. CiteSeerX . doi:10.1016/0304-405X(93)90023-5.
Preceded by
Alvin E. Roth
Lloyd S. Shapley
Laureate of the Nobel Memorial Prize in Economics
Served alongside: Lars Peter Hansen, Robert J. Shiller
Succeeded by
Jean Tirole
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