The Econometrics of Financial Markets awarded first Eugene Fama Prize

The inaugural winner of the Eugene Fama Prize for Outstanding Contributions to Doctoral Education is a book that is steeped deeply in the ideas of the University of Chicago Booth School of Business Nobel Laureate that is its namesake. Fama's evidence-based approach to financial markets analysis is the driving force behind The Econometrics of Financial Markets, an influential PhD-level textbook published by Princeton University Press in 1997.

The authors, John Campbell (now at Harvard University), Andrew Lo (now at the Massachusetts Institute of Technology) and A. Craig MacKinlay (now at the University of Pennsylvania) will receive their $250,000 prize at a one-day conference and dinner celebrating Fama's five decades of teaching at Chicago Booth.

Professor Fama is the Robert R. McCormick Distinguished Service Professor of Finance at Chicago Booth and is widely heralded for his many contributions to modern finance. He is best known for his work analyzing markets and securities prices, for which he is closely followed by both academics and financial services professionals. His advocacy of the Efficient Markets Hypothesis has spawned consistent debate in both communities.

The Econometrics of Financial Markets provides, in one place, a clear exposition of the many econometric tools needed for the analysis of the Efficient Market Hypothesis and other models of financial markets. In addition, the work provides many important empirical results that illuminate the successes of models like the Efficient Market Hypothesis, along with the many outstanding empirical puzzles that remain as challenges for future work.

In addition to his prodigious and influential research into the workings of securities markets, Fama has maintained a vital and active role on the teaching faculty at Booth. He is chairman of the Center for Research in Securities Prices, founded 40 years ago to encourage evidence-based explorations of these markets and is the author of two textbooks, The Theory of Finance (1972) and Foundations of Finance: Portfolio Decisions and Securities Prices (1976). Dating back to the 1960s, Fama has served as dissertation advisors to a great number of Booth graduates and his teaching assistants, over the years, have included notable figures like Clifford Asness, head of AQR Capital Management, an asset manager that makes frequent use of Fama's ideas.

"Gene Fama was my thesis adviser when I was at Chicago," said MacKinlay, who then worked alongside Lo at the Wharton School of Business in the 1980s and early 1990s. The two, who were working on econometric techniques of financial markets analysis, met Campbell through the National Bureau of Economic Research, where all three were members. The trio recognized that there were no standard econometric textbooks available to PhD students and set about to meet that need.

"There were textbooks on regression methodology, there was a book on time series analysis, but what was different about our book was that it was a combination of methods and results while previous work was more hypothetical," said Campbell.

The three authors had set out to accomplish an often thankless task as textbooks have traditionally not been financially remunerative, nor do they typically earn the authors the accolades from their colleagues that a much shorter paper in a peer reviewed journal might.

"Our intention for writing the book was really to create a body of work that would stand the test of time in terms of pedagogical value," said Lo. "Finance has grown very rapidly, in no small part due to Gene Fama. We wanted marry the literature of econometrics and statistics with finance."

In a paper for the Scandinavian Journal of Economics, Campbell credits Fama, Robert J. Shiller and Lars Peter Hansen (who all shared the Nobel Prize in 2013) with laying the groundwork for empirical econometrics in finance. "Empirical research in asset pricing today is conducted within a common intellectual framework, due in large part to the methodological contributions of the laureates," Campbell wrote.

A selection committee made up of Douglas Diamond, Matthew Gentzkow, Robert Gertner, John Heaton, Amir Sufi, and Pietro Veronesi surveyed hundreds of books and employed a research assistant to check for citations and syllabus mentions. The committee's short list had more than 20 books on it.

Committee member Veronesi, who studied with Campbell while Campbell was writing the book, recalls first encountering The Econometrics of Financial Markets in manuscript form as Campbell handed out photocopied sections in his classes. "Now, the main reference for econometrics is 'Campbell, Lo, MacKinlay' for almost everyone."

Committee member Heaton says that, though the selection process was arduous, the committee was especially pleased, for the first Fama prize, to have found a work that is so close to Fama's ideas and methods.

Going forward, the prize will be awarded every three years in the hopes of encouraging authors to write challenging works for PhD students of economics. The prize was funded by a group of private donors to support the discipline and to honor Fama's contributions to economic science and to create better incentives for potential textbook authors operating at the highest levels of academic finance.

"To be associated with Gene Fama in any setting would be an honor," said Lo. "When I was a grad student, I used Gene's textbooks. They were transformative for me and taught me to to think more rigorously about financial markets. This award, in Gene's name, is extraordinarily important for me."