Eugene Francis "Gene" Fama (; born February 14, 1939) is an American economist, best known for his empirical work on
portfolio theory
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificati ...
,
asset pricing
In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models.
There have been many models developed for different situations, but correspon ...
, and the
efficient-market hypothesis
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 bas ...
.
He is currently Robert R. McCormick Distinguished Service Professor of Finance at the
University of Chicago Booth School of Business
The University of Chicago Booth School of Business (Chicago Booth or Booth) is the graduate business school of the University of Chicago. Founded in 1898, Chicago Booth is the second-oldest business school in the U.S. and is associated with 10 N ...
. In 2013, he shared the
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...
jointly with
Robert J. Shiller and
Lars Peter Hansen
Lars Peter Hansen (born 26 October 1952 in Urbana, Illinois) is an American economist. He is the David Rockefeller Distinguished Service Professor in Economics, Statistics, and the Booth School of Business, at the University of Chicago and a ...
.
The
Research Papers in Economics
Research Papers in Economics (RePEc) is a collaborative effort of hundreds of volunteers in many countries to enhance the dissemination of research in economics. The heart of the project is a decentralized database of working papers, preprints, ...
project ranked him as the 9th-most influential economist of all time based on his academic contributions, .
He is regarded as "the father of modern finance", as his works built the foundation of financial economics and have been cited widely.
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
Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical ...
. Fama is a
Malden Catholic High School Athletic Hall of Fame honoree. He earned his undergraduate degree in Romance Languages
magna cum laude
Latin honors are a system of Latin phrases used in some colleges and universities to indicate the level of distinction with which an academic degree has been earned. The system is primarily used in the United States. It is also used in some Sou ...
in 1960 from
Tufts University
Tufts University is a private research university on the border of Medford and Somerville, Massachusetts. It was founded in 1852 as Tufts College by Christian universalists who sought to provide a nonsectarian institution of higher learning. ...
, where he was also selected as the school’s outstanding student-athlete.
Career
His
MBA and
PhD PHD or PhD may refer to:
* Doctor of Philosophy (PhD), an academic qualification
Entertainment
* '' PhD: Phantasy Degree'', a Korean comic series
* '' Piled Higher and Deeper'', a web comic
* Ph.D. (band), a 1980s British group
** Ph.D. (Ph.D. al ...
came from the
Booth School of Business at the
University of Chicago
The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...
in economics and
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
. His doctoral supervisors were Nobel prize winner
Merton Miller
Merton Howard Miller (May 16, 1923 – June 3, 2000) was an American economist, and the co-author of the Modigliani–Miller theorem (1958), which proposed the irrelevance of debt-equity structure. He shared the Nobel Memorial Prize in Economic ...
and Harry Roberts, but
Benoit Mandelbrot
Benoit B. Mandelbrot (20 November 1924 – 14 October 2010) was a Polish-born French-American mathematician and polymath with broad interests in the practical sciences, especially regarding what he labeled as "the art of roughness" of p ...
was also an important influence. He has spent the entirety of his teaching career at the University of Chicago.
His PhD thesis, which concluded that short-term
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...
price movements are unpredictable and approximate a
random walk
In mathematics, a random walk is a random process that describes a path that consists of a succession of random steps on some mathematical space.
An elementary example of a random walk is the random walk on the integer number line \mathbb Z ...
, was published in the January 1965 issue of the ''
Journal of Business
''The Journal of Business'' was an academic journal
An academic journal or scholarly journal is a periodical publication in which scholarship relating to a particular academic discipline is published. Academic journals serve as permanent and t ...
'', entitled "The Behavior of Stock Market Prices". That work was subsequently rewritten into a less technical article, "Random Walks In Stock Market Prices", which was published in the ''
Financial Analysts Journal
The ''Financial Analysts Journal'' is a quarterly peer-reviewed academic journal covering investment management, published by Routledge on behalf of the CFA Institute. It was established in 1945 and , the editor-in-chief is William N. Goetzma ...
'' 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.
His article "The Adjustment of Stock Prices to New Information" in the ''
International Economic Review
The ''International Economic Review'', (IER) is a quarterly peer-reviewed scientific journal in economics published by the Economics Department of the University of Pennsylvania and Osaka University. The journal's focus is wide and includes ma ...
'', 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.
In 2013, he was awarded the
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...
.
Efficient market hypothesis
Fama is most often thought of as the father of the efficient-market hypothesis, beginning with his PhD thesis. In 1965 he published an analysis of the behavior 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.
In an article in the May 1970 issue of the ''
Journal of Finance'', entitled "Efficient Capital Markets: A Review of Theory and Empirical Work",
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. 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 challenge the validity of the
Capital Asset Pricing Model (CAPM), which posits that a stock's
beta
Beta (, ; uppercase , lowercase , or cursive ; grc, βῆτα, bē̂ta or ell, βήτα, víta) is the second letter of the Greek alphabet. In the system of Greek numerals, it has a value of 2. In Modern Greek, it represents the voiced labiod ...
alone should explain its average return. These papers describe two factors in addition to a stock's market beta which can explain differences in stock returns: market capitalization and relative price. 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
In asset pricing and portfolio management the Fama–French three-factor model is a statistical model designed in 1992 by Eugene Fama and Kenneth French to describe stock returns. Fama and French were colleagues at the University of Chicago Bo ...
.
Bibliography
* ''The Theory of Finance'', Dryden Press, 1972
* ''Foundations of Finance: Portfolio Decisions and Securities Prices'', Basic Books, 1976
* '' The Fama Portfolio: Selected Papers of Eugene F. Fama'', edited by
John H. Cochrane and
Toby Moskowitz
Tobias Jacob "Toby" Moskowitz (born February 3, 1971) is an American Financial economics, financial economist and a professor at the Yale School of Management. He was the winner of the 2007 American Finance Association (AFA) Fischer Black Priz ...
, University of Chicago Press, 2017
References
External links
*
Faculty profile at the
University of Chicago
The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...
List of published worksBiography on Dimensional Fund Advisors websiteThe Fama/French Forum– Observations, opinion, research and links from financial economists Eugene Fama and Kenneth French.
*
Eugene Fama, 2005 winnerof the
Deutsche Bank Prize in Financial Economics
The Deutsche Bank Prize in Financial Economics honors renowned researchers who have made influential contributions to the fields of finance and money and macroeconomics, and whose work has led to practical and policy-relevant results.
*
*
*
*
* Schwert, G. William and Stutz, Rena M
"Gene Fama’s Impact: A Quantitative Analysis."Sept. 2014, i + 30 pp.
*
{{DEFAULTSORT:Fama, Eugene
1939 births
Fellows of the Econometric Society
Fellows of the American Academy of Arts and Sciences
Financial economists
Living people
Malden Catholic High School alumni
People from Boston
Tufts University School of Arts and Sciences alumni
University of Chicago faculty
University of Chicago Booth School of Business alumni
American Nobel laureates
Nobel laureates in Economics
American people of Italian descent
20th-century American economists
21st-century American economists
Economists from Massachusetts
Chicago School economists
Catholics from Massachusetts