The University of Chicago, CRSP, and the Stock Market

The University of Chicago, CRSP, and the Stock Market

In addition to the Nobel Laureates who have studied the stock market, thousands of academics also perform substantial and significant research in this area. The University of Chicago is the leading institution of learning in stock market research. In fact, twenty-eight of today’s seventy-three Nobel Laureates in Economics attended or taught at the University. This is an impressive thirty-eight percent of all Nobel Laureates in Economic Sciences. As of 2013, The University of Chicago list for Nobel Prizes in Economic Sciences includes:

Why is the University of Chicago so obviously prominent? In 1959, Louis Engel, vice president at the firm then known as Merrill Lynch, Pierce, Fenner & Smith made a phone call. He asked Professor James H. Lorie whether anyone knew how well most people performed in the stock market relative to other investments. Unable to answer the question, Lorie was intrigued. He proposed that Merrill Lynch fund a project with the purpose of gathering, cleaning, and completing the prices, dividends, and rates of return of all stocks listed on the NYSE. Lorie would utilize the new capabilities offered by computers in developing a survivorship-bias free database to maintain accurate securities information over time. With a complete and accurate database, researchers would no longer need to compile their own data. The project would prove invaluable to empirical research.

CRSP is an acronym for the Center for Research in Security Prices, which is located at the University of Chicago. Established in 1960 with a $300,000 grant from Merrill Lynch & Co., CRSP undertook the massive data-gathering project. From 1964 to 1986, the Center received gifts in excess of $1 million from those who yearned for the answer as much as they did. James Lorie became the center's first director, a position he held until 1975. He and Lawrence Fisher, former Associate Professor of Finance and Associate Director of CRSP, collaborated to gather the data. The two colleagues were faced with the monumental responsibility of researching the accuracy of each piece of stock information. They made use of their own formidable training and experience to fill in the blanks for missing stock prices.

At the end of four years, Lorie estimated that between two and three million pieces of information were entered onto magnetic tape. Their stock market database was completed in 1964. Lorie and Fisher analyzed total return, dividends received, and changes in capital as a result of price changes of all common stocks listed on the NYSE from December 25, 1925 to the present. On that date there were 506 companies in the database. Only 44 of those companies are still in business. In January 1964, Lorie and Fisher published their findings in an article titled Rates of Return on Investments In Common Stocks, in the Journal of Business. In the conclusions of the paper on page 9, the article proclaimed that the average compunded rate of return on common stocks listed on the NYSE over the 35 years from 1926 to 1960 was 9% for institutional investors. For the first time in history, an average rate of return could actually be measured. The front page of the New York Times financial section heralded the pair's results. Lorie and Fisher published a book on their continuing research at CRSP, titled A Half Century of Returns on Stocks & Bonds, in 1977.  If you look at the annualized return of the IFA U.S. Large Company Index from January 1964 to December 2013, it is 9.77%. And the 86 year annualized return from January 1928 to December 2013 is 9.35%, a standard deviation of 18.24% and $1 grew to $2,177. The more things change, the more they are the same. (Note that a small value tilted IFA Index Portfolio 100 had an annualized return of 11.19%, a standard deviation of 22.5%, growing $1 to $9,130 over the same period.) 

However, the project really did not get to Mr. Engel’s question. Nearly four decades later, the average investor’s performance in the market was measured by Dalbar, Inc. and was found to be significantly below the market average. Over the twenty year period ending in 2012, the average equity investor only earned about half of the return of the S&P 500 index.

CRSP continues to accumulate data on a regular basis. With a $180,000 grant from Dimensional Fund Advisors in 1984, data dating from January 1972 from NASDAQ markets was added. "If I had to rank events, I would say this one (the original CRSP Master Fuel) is probably slightly more significant than the creation of the universe," said Rex Sinquefield, former co-chairman and current director of DFA. "The entire field of finance has been changed and developed through that database."

One of the first researchers to fully leverage the power of that database was 2013 Nobel Laureate Eugene Fama (the current chairman of CRSP) who formalized the efficient-market hypothesis and later, along with Ken French, developed the 3-factor asset pricing model for equities. The existence of CRSP facilitated event studies which showed how quickly financial markets incorporate news into prices. It also facilitated the grouping of stocks into sub-asset classes such as small cap and value, which allowed the quantification of the factors that go into the calculation of expected returns. On Ken French's Website, you can find extensive returns data by style and industry, all of which is derived from CRSP.