Efficient Markets
Robert Shiller, Eugene Fama, and Lars Peter Hansen shared the Nobel Prize for economics this past week “for their empirical analysis of asset prices that greatly improved our understanding of how financial markets work, when they seem to work well and when they seem to work otherwise.”
As Ron Rimkus, CFA, and others have already pointed out, there’s some irony in the fact that Fama, the father of the efficient market hypothesis, does not recognize the existence of financial bubbles, while Shiller, author of Irrational Exuberance, has gained considerable fame for sounding alarm bells for overvalued markets.
Shiller, of course, is also well-known for his use of the cyclically adjusted P/E as a measure of stock market value. Investors who are cautious on US equities today are quick to point to the CAPE, or Shiller P/E, as clear evidence of an overvalued stock market. Market bulls prefer to look forward and the promise of strong earnings, and they've been richly rewarded for their optimism over the past two years. This divergence of opinion is what makes a market truly efficient.
Robert Shiller, Eugene Fama, and Lars Peter Hansen shared the Nobel Prize for economics this past week “for their empirical analysis of asset prices that greatly improved our understanding of how financial markets work, when they seem to work well and when they seem to work otherwise.”
As Ron Rimkus, CFA, and others have already pointed out, there’s some irony in the fact that Fama, the father of the efficient market hypothesis, does not recognize the existence of financial bubbles, while Shiller, author of Irrational Exuberance, has gained considerable fame for sounding alarm bells for overvalued markets.
Shiller, of course, is also well-known for his use of the cyclically adjusted P/E as a measure of stock market value. Investors who are cautious on US equities today are quick to point to the CAPE, or Shiller P/E, as clear evidence of an overvalued stock market. Market bulls prefer to look forward and the promise of strong earnings, and they've been richly rewarded for their optimism over the past two years. This divergence of opinion is what makes a market truly efficient.
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