While stock market prices can't be predicted in the near term, it is possible to foresee these prices over several years, findings and analyses by Eugene Fama and Lars Peter Hansen, both of the University of Chicago, and Robert Shiller of Yale University indicated, the academy said in a release.
"The laureates have laid the foundation for the current understanding of asset prices," the academy's release said. "It [the foundation] relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions."
Beginning in the 1960s, Fama and several collaborators demonstrated stock prices were extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings had a profound impact on subsequent research and changed market practice, including the emergence of so-called index funds in stock markets worldwide, the academy said.
In the 1980s, Shiller found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low, the academy said. This scenario also holds true for bonds and other assets.
Hansen developed a statistical method suited to testing rational theories of asset pricing, the academy said.