Biography:Eugene Fama

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Short description: American economist (born 1939)
Eugene Fama
Fama in 2013
Born (1939-02-14) February 14, 1939 (age 87)
Boston, Massachusetts, U.S.
InstitutionUniversity of Chicago
FieldFinancial economics, Organizational economics, Macroeconomics
School or
tradition		Chicago School of Economics
Alma materTufts University (BA)
University of Chicago (MBA, PhD)
Doctoral
advisor		Merton Miller
Harry V. Roberts
Doctoral
students		Cliff Asness, Myron Scholes, Mark Carhart
ContributionsFama–French three-factor model
Efficient-market hypothesis
Awards2005 Deutsche Bank Prize in Financial Economics
2008 Morgan Stanley-American Finance Association Award
Nobel Memorial Prize in Economics (2013)
Information at IDEAS / RePEc

Template:Chicago School (economics)

Eugene Francis "Gene" Fama (/ˈfɑːmə/; born February 14, 1939) is an American economist and Nobel Laureate.[1] He is best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis.[2]

He is Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business.[3] In 2013, he shared the Nobel Memorial Prize in Economic Sciences jointly with Robert J. Shiller and Lars Peter Hansen.[4][5] The Research Papers in Economics project ranked him as the 9th-most influential economist of all time based on his academic contributions as of 2019.[6] He is regarded as "the father of modern finance", as his works built the foundation of financial economics.[7]

Early life

Fama was born in Boston, Massachusetts, the son of Angelina (née Sarraceno) and Francis Fama.[8] All of his grandparents were immigrants from Italy.[9] Fama is a Malden Catholic High School Athletic Hall of Fame honoree.[10] He earned his undergraduate degree in Romance Languages magna cum laude in 1960 from Tufts University, where he was also selected as the school's outstanding student–athlete.[11]

Graduate studies, career, and research

Fama's MBA and PhD came from the University of Chicago Booth School of Business in economics and finance.[12] His doctoral supervisors were Nobel prize winner Merton Miller and Harry V. Roberts, but Benoit Mandelbrot was also an important influence.[13] He has spent the entirety of his teaching career at the University of Chicago.[7]

His PhD thesis concluded that short-term stock price movements are unpredictable and approximate a random walk.[14] This work was published in the January 1965 issue of the Journal of Business, entitled "The Behavior of Stock Market Prices".[15] Later work with Kenneth French showed that predictability in expected stock returns can be explained by time-varying discount rates.[16] For example, higher average returns during recessions can be explained by a systematic increase in risk aversion, which lowers prices and increases average returns.[16] His 1969 article "The Adjustment of Stock Prices to New Information" in the International Economic Review was the first significant event study.[17] This study sought to analyze how stock prices respond to an event using price data from the newly available CRSP database.[17] This was the first of literally hundreds of such published studies.[17]

Fama has served on the Board of Directors of money management firm Dimensional Fund Advisors since 1982.[18] As of the end of 2024, DFA had $786 billion of assets under management.[19] In 2013, Fama was awarded the Nobel Memorial Prize in Economic Sciences.[4] In 2019, the University of Chicago announced that a student house at Woodlawn Residential Commons would be named after Fama.[20]

Efficient market hypothesis

Main article: Finance:Efficient-market hypothesis

Fama is most often thought of as the father of the efficient-market hypothesis, which began with his PhD thesis.[21] In 1965 he published an analysis showing that stock prices exhibit fat tail distribution properties, implying extreme movements were more common than predicted on the assumption of normality.[15][22]

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.[21] First, Fama proposed three types of efficiency: (i) strong-form; (ii) semi-strong form; and (iii) weak efficiency.[21] They are explained in the context of what information sets are factored in price trend.[21] 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.[21] Semi-strong form requires that all public information is reflected in prices already, such as companies' announcements or annual earnings figures.[21] Finally, the strong-form concerns all information sets, including private information, being incorporated in price trend; it states no monopolistic information can entail profits, meaning insider trading cannot make a profit in the strong-form market efficiency world.[21]

Second, Fama demonstrated that the notion of market efficiency could not be rejected without an accompanying rejection of the model of market equilibrium.[23] This concept, known as the "joint hypothesis problem", has ever since vexed researchers.[23] Market efficiency denotes how information is factored in price, and Fama (1970) emphasizes that the hypothesis of market efficiency must be tested in the context of expected returns.[21] 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.[23] Researchers can only modify their models by adding different factors to eliminate any anomalies, in hopes of fully explaining the return within the model.[23] The anomaly, also known as alpha in the modeling test, functions as a signal to the model maker whether it can perfectly predict returns by the factors in the model.[23] 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.[23] 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.[23]

Fama–French factor models

Main article: Finance:Fama–French three-factor model

In recent decades, Fama has continued to write influential papers, often co-written with Kenneth French, that challenge the validity of the CAPM, which posits that a stock's beta (β) alone should explain its average return.[24] 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.[24] They offer evidence that a variety of patterns in average returns, often labeled as "anomalies" in past work, can be explained with their three-factor model.[24] The three-factor model used returns on the market, value (measured using book value of equity-to-market value of equity), and size (market cap) to explain portfolio returns.[24] The model introduced in this 1993 article rapidly became a standard benchmark in academic papers for evaluating portfolio performance.[24]

The initial Three-Factor model is expressed as:

Rit−Rft=αit+βi(RMt−Rft)+siSMBt+hiHMLt+ϵit

In this equation, SMB (Small Minus Big) accounts for the size premium and HML (High Minus Low) accounts for the value premium.[24]

In 2015, Fama and French expanded this framework to include profitability and investment factors to create a five-factor model.[25] They argued that the three-factor model was incomplete because it ignored much of the variation in average returns related to profitability and investment.[25] The Five-Factor model is defined as:

Rit−Rft=ai+βi(RMt−Rft)+siSMBt+hiHMLt+riRMWt+ciCMAt+eit

In this model, RMW (Robust Minus Weak) represents the difference between the returns of firms with high and low operating profitability, while CMA (Conservative Minus Aggressive) represents the difference between the returns of firms that invest conservatively versus aggressively.[25] Their research showed that with the addition of these factors, the HML factor often becomes redundant for describing average returns in certain datasets.[25]

Economic bubbles and Bitcoin

Fama has expressed skepticism about the notion that economic bubbles can be identified.[26] He argues that for something to be a bubble, its ending needs to be predicted in real time, not just after the fact.[26] He argues that conventional rhetoric about bubbles proposes no testable propositions and no ways to measure a bubble.[27] Fama has also been skeptical about the long-term viability of bitcoin, citing its extreme volatility, lack of intrinsic value, and violation of basic monetary principles.[28]

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, University of Chicago Press, 2017

References

  1. ↑ "Eugene F. Fama – Facts". https://www.nobelprize.org/prizes/economic-sciences/2013/fama/facts/. 
  2. ↑ "Eugene F. Fama Biography". https://www.chicagobooth.edu/faculty/directory/f/eugene-f-fama. 
  3. ↑ "Faculty Profile: Eugene F. Fama". https://www.chicagobooth.edu/faculty/directory/f/eugene-f-fama. 
  4. ↑ 4.0 4.1 "The Prize in Economic Sciences 2013". https://www.nobelprize.org/prizes/economic-sciences/2013/summary/. 
  5. ↑ "3 US Economists Win Nobel for Work on Asset Prices". abc news. October 14, 2013. https://abcnews.go.com/International/wireStory/americans-win-economics-nobel-20561624. 
  6. ↑ "Economist Rankings at IDEAS". Research Papers in Economics. https://ideas.repec.org/top/top.person.all.html. 
  7. ↑ 7.0 7.1 "Eugene F. Fama personal website". https://www.chicagobooth.edu/faculty/directory/f/eugene-f-fama#biography. 
  8. ↑ Read, Colin (2012). The Efficient Market Hypothesists. Palgrave Macmillan. p. 94. 
  9. ↑ "Eugene F. Fama – Biographical". https://www.nobelprize.org/prizes/economic-sciences/2013/fama/biographical/. 
  10. ↑ "Hall of Fame Honorees". Malden Catholic High School. https://www.maldencatholic.org/athletics/hall-of-fame. 
  11. ↑ "3 Americans win Nobel prize in economics". Boston Globe. 2013-10-14. https://www.bostonglobe.com/news/world/2013/10/14/yale-professor-among-winner-economics-nobel/fM4nIM1spIc1NNkLRaGtlL/story.html. 
  12. ↑ "Alumni Nobel Laureates". https://www.chicagobooth.edu/about/nobel-laureates. 
  13. ↑ "Mathematics Genealogy Project". http://genealogy.math.ndsu.nodak.edu/id.php?id=81048. 
  14. ↑ Fama, Eugene F. (1965). "Random Walks In Stock Market Prices". Financial Analysts Journal 21 (5): 55–59. 
  15. ↑ 15.0 15.1 Fama, Eugene F. (1965). "The Behavior of Stock Market Prices". Journal of Business 38 (1): 34–105. 
  16. ↑ 16.0 16.1 Fama, Eugene; French, Kenneth (1988). "Dividend yields and expected stock returns". Journal of Political Economy 96 (2): 246-273. 
  17. ↑ 17.0 17.1 17.2 Fama, E. F.; Fisher, L.; Jensen, M. C.; Roll, R. (1969). "The Adjustment of Stock Prices to New Information". International Economic Review 10 (1): 1–21. 
  18. ↑ "Board of Directors: Eugene Fama". https://www.dimensional.com/us-en/who-we-are/about-us#board-of-directors. 
  19. ↑ "About Us". https://www.dimensional.com/us-en/who-we-are/about-us. 
  20. ↑ "Woodlawn Residential Commons". https://college.uchicago.edu/housing-residence-life/halls/Woodlawn-Commons. 
  21. ↑ 21.0 21.1 21.2 21.3 21.4 21.5 21.6 21.7 Fama, Eugene F. (1970). "Efficient Capital Markets: A Review of Theory and Empirical Work". Journal of Finance 25 (2): 383–417. 
  22. ↑ "Q&A: Confidence in the Bell Curve". https://www.dimensional.com/famafrench/questions-answers/qa-confidence-in-the-bell-curve.aspx. 
  23. ↑ 23.0 23.1 23.2 23.3 23.4 23.5 23.6 Fama, Eugene F. (1991). "Efficient Capital Markets: II". Journal of Finance 46 (5): 1575–1617. 
  24. ↑ 24.0 24.1 24.2 24.3 24.4 24.5 Fama, Eugene; French, Kenneth (1993). "Common risk factors in the returns on stocks and bonds". Journal of Financial Economics 33 (1): 3–56. 
  25. ↑ 25.0 25.1 25.2 25.3 Fama, Eugene; French, Kenneth (2015). "A five-factor asset pricing model". Journal of Financial Economics 116 (1): 1–22. 
  26. ↑ 26.0 26.1 Engsted, T. (2016). "Fama on Bubbles". Journal of Economic Surveys 30 (2): 370–376. 
  27. ↑ "Why Nobel laureate Eugene Fama thinks bubbles are impossible to identify". https://www.businessinsider.com/nobel-laureate-eugene-fama-opines-on-bubbles-and-behavioral-finance-2019-11. 
  28. ↑ "Eugene Fama Predicts Bitcoin Will Become Worthless". 2025-01-30. https://www.promarket.org/2025/01/30/nobel-laureate-eugene-fama-predicts-bitcoin-will-become-worthless/. 
Awards
Preceded by
Alvin E. Roth
Lloyd S. Shapley 		Laureate of the Nobel Memorial Prize in Economics
2013
Served alongside: Lars Peter Hansen, Robert J. Shiller 		Succeeded by
Jean Tirole



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