Kellogg School of Management at Northwestern University

On Monday Eugene Fama was announced as one of three recipients of the Nobel Prize in economics. “Gene’s been on the faculty at Chicago for fifty years, and his body of work is really far-flung,” explains Bob Korajczyk, a professor of finance at the Kellogg School and former doctoral student of Fama’s. “I think he’s deserved this for a long time.”

It was largely Fama’s early work on asset pricing that earned him the award. His dissertation was one of the first papers to delve into the empirical properties of stock returns. Is it possible, he asked, to predict where a stock price is headed simply by looking at where it’s been? Fama found the answer quite simply to be no: whether one looks at daily, weekly, or even monthly data, only very small correlations exist between past and future stock performances.

That is, rather than prices unfolding predictably over time, they appear to take a “random walk” and on any given day are as likely to go down as up. The stock market is efficient, Fama concluded, responding immediately to the emergence of new information, big or small—and leaving scant room for even the most prediction-savvy investors to reliably profit from it once transaction costs are taken into account.

Of course, Robert Schiller of Yale University, another 2013 Nobel Prize winner, takes a very different point of view, arguing that the market does in fact markedly deviate from a random walk, at least over the long haul. “I think the evidence is sort of mixed,” says Korajczyk. Still, his sympathies lie largely with Fama. “When one considers the performance of these very smart money managers that are out there, it’s very difficult for them to beat a passive index. So if all of these pieces of gold were out there for any reasonably smart person to pick up, they would do a much better job.” He laughs. “So I think the data are generally more consistent with Gene’s point of view—but being a student of his might have something to do with that as well.”

Over the years, Fama hasn’t stopped at stocks, investigating the pricing of currencies, fixed-income securities, and futures. He has also developed models of risk and return. “And in between he’s done all kinds of work. He’s written extensively on banking, he’s written extensively on agency issues between managers and shareholders,” says Korajczyk. “He’s very adventurous in that sense.”

He has also served as a generous, if intimidating, mentor. “He imposed a lot of discipline on people. He wasn’t chatty; he didn’t want to talk about your research. He forced you to write down your ideas. So you would hand him a paper—that’s the way he wanted to have things done—and the next day, maybe two days later, it would come back filled with comments.” And when those comments came, they didn’t pull any punches. “But I think for moving your research forward, having that very honest feedback was really more valuable than anything else—he was a great person to work with.”

Editor’s Note: Stay tuned--in a future post, the Kellogg School’s Ravi Jagannathan will discuss his colleague and former advisor Lars Hansen, the third 2013 Nobel Prize winner in economics. Photo courtesy of the University of Chicago Booth School of Business.


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