Eugene Fama is the Father of Financial Management and Father of Modern Finance
Eugene Fama is a very remarkable individual who is now a Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. He was ranked as the 9th-most influential economist of all times in April 2019 based on his academic contributions, when he shared the Nobel Memorial Prize in Economic Sciences jointly with Lars Peter Hanson and Robert Shiller.
His Doctorial supervisors were Nobel Prize winner and Harry Roberts and Merton Miller, At the Booth School of Business found at the University of Chicago he was awarded his MBA and PhD in finance and economics.
Even though all his grandparents were immigrants from Italy, Boston Massachusetts is Fama’s birthplace and his parents are Francis and Angelina Fama. Eugene an Athletic Hall of Fame honored awardee who attended the Maiden Catholic High School before he earned his undergraduate degree in 1960 in Romance Languages magna cum laude when he pursued higher education at Tufts University where he again became one, of the top student-athletes at the school.
He was influenced by Benoit Mandelbrot and has spent a lot of his time teaching at the University of Chicago.
Eugene Fama is father of the efficient-market hypothesis
His very impressive PhD thesis was published in the Journal of Business in January 1965; and in 1968 in Institutional Investor it was entitled “The Behavior of Stock Market Prices” and concluded that stock returns were explainable with time many different discount rates. It was later rewritten into an article that was less technical Walks in Stock Market Prices”. His work after that showed how predictability in expected stock returns can be explained by time varying discount rates. Meaning higher average returns during recessions can be explained by a systematic increase in risk aversion which lowers prices and increases average returns. In 1969 Fama won the Nobel Memorial Prize in Economic Sciences in 2013. Another very important work that he did in 1969 has been recognised by many influential persons. It was an interesting article (written with several co-authors) “The Adjustment of Stock Prices to New Information” he made an effort to analyse how stock prices respond to events, using price data from CRSP database, it was the first of many other of such published studies.
The PhD thesis Fama did in 1965 has caused persons to see him as the person with the voice of authority for the efficient-market hypothesis. He had also published an analysis about the behavior of stock market prices. He explained his ideas about the “fat tail distribution properties”, he implied that extreme movements were more common than predicted on the assumption of Normality.
In 1970 he proposed two concepts that are being used on efficient markets even now, when he wrote an article entitled “Efficient Capital Markets”. Strong form, semi strong form and weak efficiency are the three types of efficiencies that were first proposed by Fama. The information set was historical prices in weak form, it could be difficult to profit from this, when all public information was already reflected in prices, he referred to Companies announcements and annual earnings figures and thought this he saw as the requirements for the semi strong form.
The strong form included all information sets and incorporated in price trends and no monopolistic information can require profits. Insider trading were excluded from profit making and he also explained how the notion of market efficiency could not be removed while the model of market equilibrium still existed. These concepts have not found favor in the eyes of some researchers, but they still stand.
The creation of index funds and exchange traded funds is based on Fama’s work on market efficiency and it has been included in about $4.3 trillion of the $18.1 trillion of the total of the of Investment Company’s net assets. This was stated in the 2016 Investment Company Fact book. It shows that his work has been used because it has practical importance.
He continues to influence most of the current generations of finance researchers as he still plays an important role in maintaining a thought leadership position at the University of Chicago Booth School of Business. He is Chairman of the Board of Directors at the Center for Research in Security Prices.
There is no doubt that Eugene Fama and all his achievements has influenced stock markets in many places throughout the years.
However, Fama has been controversial recently because of a series of papers that he wrote with co-author Kenneth French, it has caused doubt to be cast on the validity of the (CAPM) Capital Asset Pricing Model which is rooted in the belief that a stock’s beta alone should explain its average return. These papers explained differences in stock returns: value and market capitalization which they believe are above and beyond a stock markets beta and explains differences in stock returns. They are looked at as anomalies in past work.