Robert Shiller, An Unbiased Reexamination of Stock Market Volatility: Discussion, The Journal of Finance, Vol. 40, No. 3, Papers and Proceedings of the Forty-Third Annual Meeting American Finance Association, Dallas, Texas, December 28-30, 1984 (Jul., 1985), pp. 688-689

[A distributed lag estimator is developed here from Bayesian priors regarding the"smoothness" of the lag curve. "Smoothness" priors of the dth degree are represented by a normal density function with zero mean of the difference of order d + 1 of the coefficients, where d will usually be one to zero. Such probabilistic priors, which do not imply any parametrization of the lag curve, are, it is contended here, a more accurate representation of the kind of prior knowledge that has led many researchers to use the polynomial distributed lag estimation procedure, and other parametrization procedures, in the past. The estimator developed here is, moreover, very simple in its implementation. All that is needed is any least squares regression program.]

Tests of a representation of the efficient markets model (the dividend-rtaio model of Campbell and Shiller (1988a)) of the stock market can be made by regressing (transformed) ex-post values on (transformed) actual values and testing whether the slope coefficient is one. Such tests are run here with some improvements. The results of the tests are that the efficient markets model is strongly rejected with U.S. data 1901-1987 in favor of an alternative that stock prices should have been much less volatile. Copyright 1990 by MIT Press.

This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned toward narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920–1921 Depression, the Great Depression of the 1930s, the so-called Great Recession of 2007–2009, and the contentious political-economic situation of today are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future. (JEL D72, E32, G01, N10)

The fact that firms seem to follow an earnings payout policy that results in a dividend stream has often been brought up in criticism of the variance inequality tests that I used (1981a) to call into question the simple efficient markets model. It seems that the smoothing lowers the variance of detrended real dividends, and this may account for the apparent inadequacy of dividends movements to account for price movements. The fact that the present value of actual dividends p* is itself a moving average of dividends d, and hence a smoothed version of dividends, is also brought up in criticism of the inequality that involves p*. However, dividend smoothing or the smoothing implicit in p* does not pose any problems for the theoretical volatility inequalities. As long as (real detrended) price p is the present value of expected (real detrended) dividends d, then the dividends, whether they are smoothed or not, must move enough according to the measures in the inequalities if the price movements are to be justified. Terry Marsh and Robert Merton (1986) use arguments relying on the above-noted smoothing relations to show a sense in which, for sample variances, the variance inequalities in my paper may be thought of as reversed. Marsh and Merton model the behavior of those decision makers who set the level of dividends; the model (13) in their paper is a dividend smoothing model. Moreover, the proof of their Theorem 2 also makes use of the smoothing implicit in p*. However, the feature of the model that causes the variance inequalities to be invalidated is not the smoothing per se, but the nonstationarity in dividends that is induced by the particular dividend smoothing rule (13). Substituting their equation (13) into their equation (2) and then into their equation (1), we find

The institutions for financing owner-occupied housing have not progressed as they should, and the financial innovation that has followed the financial crisis of 2007-2009 has not been focused on improving the risk management of individual homeowners. This paper lists a number of barriers to housing finance innovation, and in light of these barriers, the problems of some major innovations of the past and future: self-amortizing mortgages, price-level adjusted mortgages (PLAMs), shared appreciation mortgages (SAMs), housing partnerships, and continuous workout mortgages (CWMs).

Robert J. Shiller delivered his Prize Lecture on 8 December 2013 at Aula Magna, Stockholm University.

The concept of the Good Society--grounded in principles of reciprocity and the Golden Rule--is as ancient as human civilization. To many the concept may appear in conflict with the goings-on of financial markets. This may be especially true after the financial crisis. Financial theory and financial legislation cannot ignore this apparent conflict, but must instead find ways to reduce it. When teaching economics it is important to convey how individuals and organizations impose rules and standards which help reconcile their deeply-held beliefs with their business practices.