Eugene F. Fama.

Eugene F. Fama (born February 14, 1939) is an American economist particularly known for his work on portfolio theory and asset pricing, both theoretical and empirical. He was born in Boston, Massachusetts. He earned his undergraduate degree in French from Tufts University in 1960 and his Ph.D. from the University of Chicago in economics and finance. He has spent most of his teaching career at the University of Chicago. Image File history File links Interview_eugene_fama_image1. ... Image File history File links Interview_eugene_fama_image1. ... February 14 is the 45th day of the year in the Gregorian Calendar. ... 1939 (MCMXXXIX) was a common year starting on Sunday (link will take you to calendar). ... An economist is someone who studies Economics. ... Valuation is the process of estimating the value of an asset or liability. ... For other uses of Boston, see Boston (disambiguation) Boston is the capital and largest city in the Commonwealth of Massachusetts in the United States. ... State nickname: Bay State Official languages English Capital Boston Largest city Boston Governor Mitt Romney (R) Senators Edward Kennedy (D) John Kerry (D) Area  - Total  - % water Ranked 44th 27,360 km² 25. ... Tufts University is a private university located in Medford, Massachusetts, a suburb of Boston. ... 1960 was a leap year starting on Friday (link will take you to calendar). ... The University of Chicago is a private co-educational university located in Chicago, Illinois. ... U.S. Economic Calendar Economics at the Open Directory Project Economics textbooks on Wikibooks The Economists Economics A-Z Daily analysis of economics in the news (UK focus) Institutions and organizations Bureau of Labor Statistics - from the American Labor Department Center for Economic and Policy Research (USA) National Bureau... Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects. ...

His Ph.D. thesis, which concluded that stock price movements are unpredictable and follow a random walk, was published as the entire 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, which was published in Financial Analysts Journal in 1966 and Institutional Investor in 1968. It is generally recognized that with this article he ushered in a new era in financial research: empirical financial research. With this single paper, the direction of finance, both academic and as practiced today on Wall Street, was forever altered and modern finance was born. See stock (disambiguation) for other meanings of the term stock In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. ... 1965 (MCMLXV) was a common year starting on Friday (link goes to calendar). ... 1966 (MCMLXVI) was a common year starting on Saturday (link goes to calendar) // Events January January 1 - In a coup, Colonel Jean-Bédel Bokassa ousts president David Dacko and takes over the Central African Republic. ... 1968 (MCMLXVIII) was a leap year starting on Monday (the link is to a full 1968 calendar). ...

Fama is most often thought of as the father of efficient market theory. In a ground-breaking 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 crucial concepts that have defined the conversation on efficient markets ever since. First, Fama proposed three types of efficiency: (1) strong-form; (ii) semi-strong form; and (iii) weak efficiency. Secondly, Fama demonstrated that you cannot reject the notion of market efficiency without also rejecting the model of market equilibrium (e.g. the price setting mechanism). This concept known as the "joint hypothesis problem" has ever since vexed researchers. Efficient fuked up market theory is a field of economics which seeks to explain the workings of capital markets such as the stock market. ... 1970 (MCMLXX) was a common year starting on Thursday. ...

In recent year, Fama has become controversial again, for a series of papers, co-written with Kenneth French, that attack and seemingly overturn the notion of market-efficency. These papers describe two factors above and beyond a stock's market beta which can explain differences in stock returns: market capitalization and "value". Kenneth R. French (born March 10, 1954) is the Carl E. and Catherine M. Heidt Professor of Finance at the Tuck School of Business, Dartmouth College. ...

This willingness to let the data lead one to the verifiable "truth" are the ultimate defining characteristic of Eugene Fama, much more so than any one theory or set of results.

Additionally, Fama co-authored the textbook The Theory of Finance with Nobel Memorial Prize in Economics winner Merton H. Miller. He is also the director of research of Dimensional Fund Advisors, Inc., an investment advising firm with $69 billion under management (as of 2005). One of his children, Eugene F. Fama, Jr., is a vice president of the company. The Bank of Sweden Prize in Economic Sciences (Swe. ... Merton Howard Miller (May 16, 1923 - June 3, 2000) won the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1990, along with Harry Markowitz and William Sharpe. ... 2005 is a common year starting on Saturday of the Gregorian calendar. ...

Fama and French Three Factor Model

In the portfolio management field, Fama and French developed the highly successful three factor model to describe the market behavior.

CAPM uses a single factor, beta, to compare a portfolio with the market as a whole. But it oversimplifies the complex market. Fama and French started with the observation that two classes of stocks have tended to do better than the market as a whole: (i) small caps and (ii) stocks with a high book-value-to-price ratio (customarily called "value" stocks; their opposites are called "growth" stocks). They then added two factors to CAPM to reflect a portfolio's exposure to these two classes:

 r - Rf = beta3 x ( Km - Rf ) + bs x SMB + bv x HML + alpha 

Here r is the portfolio's return rate, Rf is the risk-free return rate, and Km is the return of the whole stock market. The "three factor" beta is analogous to the classical beta but not equal to it, since there are now two additional factors to do some of the work. SMB and HML stand for "small [cap] minus big" and "high [book/price] minus low"; they measure the historic excess returns of small caps and "value" stocks over the market as a whole. By the way SMB and HML are defined, the corresponding coefficients bs and bv take values on a scale of roughly 0 to 1: bs = 1 would be a small cap portfolio, bs = 0 would be large cap, bv = 1 would be a portfolio with a high book/price ratio, etc.

Fama and French still see high returns as a reward for taking on high risk as in CAPM. Small-cap stocks tend to be more volatile than large cap, but yield better in the long term. Especially during stressful economic times, small-cap can lose its value as much as 50%-80%. They also observe in particular that if returns increase with book/price, then stocks with a high book/price ratio must be more risky than average - exactly the opposite of what a traditional business analyst would tell you. The difference comes from whether you believe in the efficient market theory. The business analyst doesn't believe it, so he would say stocks with high book/price ratio (in the aggregate) are cheap and therefore indicates a buying opportunity. But if you do believe in efficient market theory then you believe cheap stocks can only be cheap for a good reason, namely that investors think they're risky...

Three factor model is gaining recognition in portfolio management. Morningstar.com classifies stocks and mutual funds based on these factors. Many studies show that majority of actively managed mutual funds underperform broad indexes based on three factors if classifed properly. This leads to more and more index funds and ETFs being offered based on three factor model.

Publication - Chronological Order

1. "Mandelbrot and the stable Paretian Hypothesis,"[1]Journal of Business (October 1963); reprinted in Paul Cootner(ed.), The Random Character of Stock Prices (MIT Press, 1964).

2. "The Behavior of Stock Market Prices,"[2] Journal of Business(January 1965).

3. "Portfolio Analysis in a Stable Paretian Market," Management Science (January 1965).

4. "Tomorrow on the New York Stock Exchange,"[3] Journal of Business (July 1965).

5. "Random Walks in Stock Market Prices,"[4] paper number 16 in the series of Selected Papers of the Graduate School of Business, University of Chicago, reprinted in the Financial Analysts Journal (September-October 1965), The Analysts Journal, London (1966), The Institutional Investor, 1968.

6. "Filter Rules and Stock Market Trading Profits" [5](with Marshal Blume), Journal of Business, Supplement (January 1966).

7. "Solutions for Cash Balance and Simple Dynamic Portfolio Problems" [6] (with Gary Eppen), Journal of Business (January 1968).

8. "Some Properties of Symmetric Stable Distribution" (with Richard Roll), Journal of the American Statistical Association(January 1968).

9. "Risk, Return, and General Equilibrium: Some Clarifying Comments." [7]Journal of Finance (March 1968).

10. "Dividend Policy of Individual Firms: An Empirical Analysis" (with Harvey Babiak), Journal of the American Statistical Association (December 1968).

11. "Risk and the Evaluation of Pension Fund Portfolio Performance, " Administration Institute, Park Ridge, Illinois, 1968.

12. "The Adjustment of Stock Prices to New Information"[8] (with L. Fisher, M. Jensen, and R. Roll), International Economic Review February 1969).

13. "Cash Balance and Simple Dynamic Portfolio Problems with Proportional Costs" [9](with Gary Eppen), International Economic Review(June 1969).

14. "Multi-Period Consumption-Investment Decisions," [10][American Economic Review](March 1970).

15. "Efficient Capital Markets: A Review of Theory and Empirical Work," [11]Journal of Finance (May 1970).

16. "Three Asset Cash Balance and Dynamic Portfolio Problems" (with Gary Eppen), Management Science (January 1971).

17. "Risk, Return, and Equilibrium," Journal of Political Economy (January-February 1971).

18. "Parameter Estimates for Symmetric Stable Distribution" (with Richard Roll), Journal of the American Statistical Association] (June 1971).

19. "Information and Capital Markets" (with Arthur Laffer), Journal of Business (July 1971). Arthur Betz Laffer, Sr. ...

20. The Theory of Finance (with Merton Miller). (Holt, Rinehart and Winston, 1972). These hyperlinks are available directly from Eugene Fama's home page. Merton Howard Miller (May 16, 1923 - June 3, 2000) won the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1990, along with Harry Markowitz and William Sharpe. ...

The Theory of Finance Preface and Table of Contents

Chapter 1 A Model of the Accumulation and Allocation of Wealth by Individuals

Chapter 2 Extension of the Model to Durable Commodities Production

Chapter 3 Criteria For Optimal Investment Decsions

Chapter 4 Financing Decisions, Investment Decisions, and the Cost of Capital

Chapter 5 The Expected Utility Approach to the Problem of Choice under Uncertainty

Chapter 6 The Two Period Consumption Investment Model

Chapter 7 Risk, Return, and Market Equilibrium

Chapter 8 Multiperiod Models

21. "Ordinal and Measurable Utility." In Studies in the Theory of Capital Markets, edited by Michael Jensen. New York: Praeger, 1972. Michael C. Jensen joined the faculty of the Harvard Business School in 1985. ...

22. "Components of Investment Performance," Journal of Finance (June 1972).

23. “The Number of Firms and Competition” (with Arthur Laffer), American Economic Review (September 1972).

24. “Perfect Competition and Optimal Production Decisions and Uncertanity,” Bell Journal of Economics and Management Science (autumn 1972).

25. “Risk, Return, and Equilibrium: Empirical Tests” (with J. Macbeth), Journal of Political Economy (May-June 1973).

26. “A Note on the Market Model and the Two-Parameter Model,” Journal of Finance (December 1973).

27. “Tests of the Multiperiod Two-Parameter Model” (With J. Macbeth), Journal of Financial Economics (March 1974).

28. “Long-Term Growth in a Short-Term Market” (with J. Macbeth), Journal of Finance (June 1974).

29. "The Empirical Relationship between the Dividend and Investment Decisions of Firms," American Economic Review (June 1976).

30. “Short-Term Interest Rates as Predictors of Inflation,” American Economic Review (June 1975).

31. Foundation of Finance (New York: Basic Book, 1976). These hyperlinks are available directly from Eugene Fama's home page.

PREFACE

Chapter 1 The Behavior of Stock Market Returns

Chapter 2 The Distribution of the Return on a Portfolio

Chapter 3 The Market Model Theory and Estimation

Chapter 4 The Market Model Estimates

Chapter 5 Efficient Capital Markets

Chapter 6 Short Term Interest Rates as Predictors of Inflation

Chapter 7 The Two Parameter Portfolio Model

Chapter 8 Capital Market Equilibrium in a Two Parameter World

Chapter 9 The Two Parameter Model Empirical Tests

32. “Inflation Uncertainty and Expected Returns on Treasury Bills.” Journal of Political Economy (June 1976).

33. “Forward Rates a Predictors of Future Spot Rates,” Journal of Financial Economics (October 1976).

34. “Human Capital and Capital Market Equilibrium” (with G. William Schwert), Journal of Financial Economics (January 1977).

35. “Interest Rates and Inflation: The Message in the Entrails,” American Economic Review (June 1977).

36. “Risk-Adjusted Discount Rates and Capital Budgeting under Uncertainty,” Journal of Financial Economics (August 1977).

37. “Asset Return and Inflation” (with G. William Schwert), Journal of Financial Economics (November 1977).

38. “The Effects of a Firms’s Investment and Financing Decisions on the Welfare of it Securityholders,” American Economic Review (June 1978).

39. "Inflation, Interest and Relative Price” (with G. William Schwert), Journal of Business (April 1979).

40. “Money, Bonds, and Foreign Exchange” (with André Farber), American Economic Review (September 1979).

41. “Banking in the Theory of Finance,” Journal of Monetary Economics (January 1980).

42. “Agency Problem and the Theory of the Firm,”Journal of Political Economy (April 1980).

43. “Stock Returns, Real Activity, Inflation and Money,” American Economic Review (September 1981).

44. “Inflation, Output and Money,” Journal of Business (April 1982).

45. “Inflation, Real Returns and Capital Investments” (with Michael Gibbson), Journal of Monetary Economics (May 1982).

46. "Separation of Ownership and Control" (with Michael Jensen), Journal of Law and Economics (June 1983).

47. "Agency Problems and Residual Claims" (with Michael Jensen), Journal of Law and Economics (June 1983).

48. "Financial Intermediation and Price Level Control," JOurnal of Monetary Economics (July 1983).

49. "A Comparison of Inflation Forecasts" (with Michael Gibbsons), Journal of Monetary Economics (May 1984).

50. "The Information in the Term Structure," Journal of Financial Economics, (December 1984).

51. "Fowrward and Spot Exchange Rates," Journal of Monetary Economics, (November 1984).

52. "Term Premiums in Bond Returns," Journal of Financial Economics, (December 1984).

53. "What's Different About Banks?," Journal of Monetary Economics, (January 1985).

54. "Organizational Forms and Investment Decisions" (with Michael Jensen), Journal of Financial Economics, (March 1985).

55. "Term Premiums an Default Premiums in Money Markets," Journal of Financial Economics, (September 1986).

56. "Commodity Future Prices" Evidence on Forecast Power and Premiums," (with Kenneth R. French), Journal of Business, (January 1987).

57. "The Information in Long-Maturity Forward Rates," (with Robert R. Bliss), American Economic Review, (September 1987).

58. "Permanent and Temporary Components of Stock Prices," (with Kenneth R. French), Journal of Political Economy ,(April 1988).

59. "Dividend Yields and Expected Stock Returns," (with Kenneth R. French), Journal of Financial Economics, 22 (October 1988), 3-25.

60. "Business Cycles and the Behaviour of Metals Prices," (with Kenneth R. French), Journal of Finance , (December 1988).

61. "Perspective on October 1987, or, What Did we learn from the Crash?" in Black Monday and the Future of Financial Markets, edited by R.W. Kamphuis, Jr.,R.C. Kormendi, and J.W.H. Watson (Homewood: Dow-Jones-Irwin, Inc.), 1989.

62. "Business Conditions and Expected Returns on Stocks and Bonds," (with Kenneth R. French), Journal of Financial Economics, 25 (November 1989), 23-49.

63. "Contract Costs and Financing Decisions," Journal of Business, 63 (January 1990), S71-91.

64. "Term Structure Forecasts of Interest Rates, Inflation, and Real Returns," Journal of Monetary Economics, 25 (January 1990), 59-76.

65. "Stock Returns, Expected Returns, and Real Activity," Journal of Finance , 45 (September 1990), 1089-1109.

66. "Time, Salary, and Incentive Payoffs in Labor Contracts," Journal of Labor Economics, 9 (January 1991), 25-44.

67. "Efficient Markets: II," Fiftieth Anniversary Inveited Paper, Journal of Finance , 46 (December 1991), 1575-1617.

68. "The Cross-Section of Expected Stock Returns," (with Kenneth R. French), Journal of Finance, 47 (June 1992), 427-465. Winner of the Smeith Breeden Prize for the best paper in the journal during 1992.

69. "Diversification Returns and Asset Contributions, "with David G. Booth), Financial Analysts Journal, (May/June 1992), 26-32.

70. "Transitory Variation in Investment and GNP," Journal of Monetary Economics, 30 (December 1992), 467-480.

71. "Differences in the Risks and Returns of NYSE and NASD Stocks," (with Kenneth R. French, David G. Booth, and Rex Sinquefield), Financial Analyst Journal, (Janurary/February 1993).

72. "Common Risk Factors in the Returns on Stocks and Bonds," (with Kenneth R. French), Journal of Financial Economics, 33 (February 1993), 3-56.

73. "Size and Book-to-Market Factors in Earnings and Returns," (with Kenneth R. French), Journal of Finance , 50 (March 1995), 131-156.

74. "Multifactor Explanations of Asset Pricing Anomalies," (with Kenneth R. French), Journal of Finance , 51 (March 1996), 55-84.

75."Discounting under Uncertainty," Journal of Business, 69(October 1996), 415-428.

76. "The CAPM Is Wanted, Dead or Alive," (with Kenneth R. French), Journal of Finance , 51 (December 1996), 1947-1958.

77. "Multifactor Portfolio efficiency and Multifactor Asset Pricing," Journal of Financial and Quantitative Analysis, 31 (December 1996), 441-465.

78. "Industry Cost of Equity," (with Kenneth R. French), Journal of Financial Economics, 43 (February 1997), 153-193.

79. "Determining the Number of Priced State Variables in the ICAPM," Journal of Financial and Quantitative Analysis, 33 (June 1998), 217-231.

80. "Taxes, Financing Decisions, and Firm Value," (with Kenneth R. French), Journal of Finance , 53 (June 1998), 819-843.

81. "Market Efficiency, Long-Term Returns, and Behavioural Finance," Journal of Financial Economics, 49 (September 1998), 283-306. Winner of the Fama-DFA Prize for the best asset pricing paper in the journal during 1998.

82. "Value versus Growth: The International Evidence," (with Kenneth R. French), Journal of Finance , 53 (December 1998), 1975-1999.

83."The Corporate Cost of Capital and the Return on Corporate Investment," (with Kenneth R. French), Journal of Finance , 54 (December 1999), 1939-1967.

84. "Characteristics, Covariances, and Average Returns: 1929-1997," (with James L. Davis and Kenneth R. French), Journal of Finance , 55 (February 2000), 389-406.

85. "Forecasting Profitability and Earnings," (with Kenneth R. French), Journal of Business, 72 (April 2000), 161-175.

86. "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay," (with Kenneth R. French), Journal of Financial Economics, 60 (April 2001), 3-43. Jensen Prize (second place) for the best 2001 Paper in corporate finance and organizations.

87. "Testing Tradeoff and Pecking Order Predictions about Dividends and Debt," (with Kenneth R. French), Review of Financial Studies, 15 (Spring 2002), 1-33.

88. "The Equity Premium," (with Kenneth R. French), Journal of Finance , 57 (April 2002), 637-659.

89. "New List: Fundamentals and Survival Rates," (with Kenneth R. French), Journal of Financial Economics, 72 (August 2004), 229-269.

90. "The Capital Asset Pricing Model: Theory and Evidence," (with Kenneth R. French), Journal of Economic Perspective, 18 (Summer 2004), 25-46.

91. "Financing Decisions: Who Issues Stock?," (with Kenneth R. French), Journal of Financial Economics, 76 (June 2005), 549-582.

92. "The Behavior of Interest Rates," Review of Financial Studies, Forthcoming.

93. "The Value Premium and the CAMP," (with Kenneth R. French), Journal of Finance , forthcoming.

External links

• Eugene Fama's home page at the University of Chicago
• An interview with Eugene Fama
• Biography on Dimensional Fund Advisors website