FE_L0 Flashcards
1
Q
Nobel Prize (2013)
A
- Awarded to Eugene Fama, Bob Shiller, and Lars Hansen
- Recognised for their empirical analysis of asset prices
2
Q
Fama–Shiller Controversy
A
- Fama: Father of the Efficient-Market Hypothesis
- Shiller: Claimed markets overreact and challenged EMH
- Demonstrates how two contrasting theories can both be insightful
3
Q
Shiller’s Position
A
- Argues stock prices move too much relative to fundamentals
- Called the EMH ‘one of the most remarkable errors in economic thought’
- Believes markets can overshoot due to psychological factors
4
Q
CAPM (1970)
A
- Capital Asset Pricing Model explains how assets are priced by risk
- Predicts returns are commensurate with market risk
- Supports a complete market with optimal risk allocation
5
Q
Key CAPM Assumptions
A
- Complete markets: infinite assets or complex derivatives
- Unlimited borrowing at riskfree rates
- Identical beliefs among investors
6
Q
CAPM Limitations
A
- Real markets are incomplete
- Complexity can lead to moral hazard
- Identical beliefs assumption is unrealistic
7
Q
Risk Sharing
A
- Reduces uncertainty by outsourcing risk
- Involves paying a risk premium to be protected
- Fundamental mechanism for financial stability
8
Q
Subprime Crisis Tension
A
- Shows that blind belief in CAPM logic can be dangerous
- Over-reliance on ‘perfect’ market theory aggravated risks
- Emphasises need for critical distance in financial models
9
Q
Fama vs. Shiller Ongoing
A
- Fama refined models to include multi-factor approaches
- Shiller still endorses a loose version of efficient markets
- Both agree on the importance of financial markets but differ on volatility
10
Q
Economic Methodology
A
- Two contradictory theories can still have intellectual value
- George Box: ‘All models are wrong, but some are useful’
- Fama’s framework: a starting point for understanding markets
