Table Of Content

The Fama Portfolio The Fama P ortfolio . . . Selected Papers of Eugene F. Fama . . . Edited by John H. Cochrane and Tobias J. Moskowitz The University of Chicago Press Chicago and London The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 2017 by The University of Chicago All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission, except in the case of brief quotations in critical articles and reviews. For more information, contact the University of Chicago Press, 1427 E. 60th St., Chicago, IL 60637. Published 2017 Printed in the United States of America 26 25 24 23 22 21 20 19 18 17 1 2 3 4 5 ISBN-13: 978-0-226-42684-6 (cloth) ISBN-13: 978-0-226-42698-3 (e-book) DOI: 10.7208/chicago/9780226426983.001.0001 Library of Congress Cataloging-in-Publication Data Names: Cochrane, John H. (John Howland), 1957– editor, author. | Moskowitz, Tobias J. (Tobias Jacob), 1971– editor, author. | Fama, Eugene F., 1939– Works. Selections. Title: The Fama portfolio : selected papers of Eugene F. Fama / edited by John H. Cochrane and Tobias J. Moskowitz. Description: Chicago : The University of Chicago Press, 2017. Identifiers: lccn 2016036174 | ISBN 9780226426846 (cloth : alk. paper) | ISBN 9780226426983 (e-book) Subjects: LCSH: Capital market. | Finance. | Efficient market theory. | Stocks—Rate of return. Classification: LCC HG4523 .F36 2017 | DDC 332/.0415—dc23 LC record available at https:// lccn.loc.gov/2016036174 This paper meets the requirements of ANSI/NISO z39.48-1992 (Permanence of Paper). Contents . . . Preface, by John H. Cochrane and Tobias J. Moskowitz ix I. Introductions My Life in Finance 3 Eugene F. Fama Things I’ve Learned from Gene Fama 24 Kenneth R. French Gene Fama’s Impact: A Quantitative Analysis 30 G. William Schwert and René M. Stulz II. Efficient Markets Efficient Markets and Empirical Finance 53 John H. Cochrane and Tobias J. Moskowitz The Great Divide 63 Clifford Asness and John Liew Efficient Capital Markets: A Review of Theory and Empirical Work 76 Eugene F. Fama Efficient Capital Markets: II 122 Eugene F. Fama Market Efficiency, Long-Term Returns, and Behavioral Finance 174 Eugene F. Fama III. Efficiency Applied: Event Studies and Skill Fama, Fisher, Jensen, and Roll (1969): Retrospective Comments 203 Ray Ball Eugene Fama and Industrial Organization 213 Dennis W. Carlton The Adjustment of Stock Prices to New Information 219 Eugene F. Fama, Lawrence Fisher, Michael C. Jensen, and Richard Roll [ v ] contents Luck versus Skill 243 John H. Cochrane and Tobias J. Moskowitz Luck versus Skill and Factor Selection 250 Campbell R. Harvey and Yan Liu Luck versus Skill in the Cross-Section of Mutual Fund Returns 261 Eugene F. Fama and Kenneth R. French IV. Risk and Return Risk and Return 303 John H. Cochrane and Tobias J. Moskowitz Risk, Return, and Equilibrium: Empirical Tests 315 Eugene F. Fama and James D. MacBeth The Cross-Section of Expected Stock Returns 349 Eugene F. Fama and Kenneth R. French Common Risk Factors in the Returns on Stocks and Bonds 392 Eugene F. Fama and Kenneth R. French Multifactor Explanations of Asset Pricing Anomalies 450 Eugene F. Fama and Kenneth R. French V. Return Forecasts and Time-Varying Risk Premiums Return Forecasts and Time-Varying Risk Premiums 487 John H. Cochrane Short-Term Interest Rates as Predictors of Inflation 502 Eugene F. Fama Forward Rates as Predictors of Future Spot Rates 524 Eugene F. Fama Forward and Spot Exchange Rates 544 Eugene F. Fama Dividend Yields and Expected Stock Returns 568 Eugene F. Fama and Kenneth R. French The Information in Long-Maturity Forward Rates 596 Eugene F. Fama and Robert R. Bliss [ vi ] contents VI. Corporate Finance and Banking Corporate Finance 617 Amit Seru and Amir Sufi Agency Problems and the Theory of the Firm 624 Eugene F. Fama Separation of Ownership and Control 645 Eugene F. Fama and Michael C. Jensen Dividend Policy: An Empirical Analysis 671 Eugene F. Fama and Harvey Babiak Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay? 707 Eugene F. Fama and Kenneth R. French Financing Decisions: Who Issues Stock? 750 Eugene F. Fama and Kenneth R. French Banking in the Theory of Finance 789 Eugene F. Fama Our Colleague, by John H. Cochrane and Tobias J. Moskowitz 809 Contributors 815 [ vii ] Preface . . . John H. Cochrane and Tobias J. Moskowitz In October 2014, colleagues, students, and friends joined to celebrate Gene Fama’s 50 years at the University of Chicago and his record of scholarship, teaching, service, and leadership. In December 2013, Gene received the Nobel Prize in Economics. These events inspired us to create this volume. This volume provides an introduction to Gene’s work for a new genera- tion of readers who did not study all of Fama’s papers as they came along. It provides an entry point and a collection of some of his most influential work. Putting together the list of papers to include was not an easy task. Which Fama papers should one read? Well, all of them! But one must select, and we did our best. Of course we included the initial, most famous papers in each area. But for Gene Fama, as for the rest of us, ideas often get clearer and simpler over time. Also, early papers in any science have to spend a lot of time on robustness checks, exploring other ways of doing things, and so forth. Later papers can take that for granted, focus on the main point, and branch out to wider and more interesting applications. Therefore, in many cases, we have also included papers later in a series. Though these papers are not as famous or highly cited, they often are a better place for readers to start. This volume intertwines essays written by ourselves and many of our colleagues. Gene’s work is notable of course for its influence, how it changed ideas, and how others took Gene’s ideas and used them in many other areas and investigations. Many of Gene’s ideas seem commonplace and obvious in retrospect, but they were not so at the time. So we asked our essayists to explain some of the background of each series of papers, to tie together some of the larger literature in each area—both Gene’s papers that we left out and con- temporaneous work of others—and to explain a bit how we now understand issues after further rounds of digestion and simplification. However, we have not tried, and we have not asked the other authors to try, to write a history of thought. Like all great ideas, modern financial economics has many parents. Gene is the first to acknowledge all the giants on whose [ ix ]