EMPIRICS of FINANCIAL MARKETS

4th Module, 2002/2003

Professor: Alexei Goriaev, agoriaev@nes.ru
TA: Alexander Barinov, abarinov@nes.ru

Summary

In this course, we consider applications of econometric techniques to the analysis of financial markets, with a special emphasis to the interaction of economic theories, econometric techniques, and empirical results. First, we discuss empirical tests of market efficiency, analyzing the predictability of asset returns. The degree of market efficiency is investigated in the event studies measuring the stock price response to such economic events as share repurchase or dividend announcement. Then, we study the possible applications and validity of the CAPM and multi-factor asset pricing models, with particular attention to the return anomalies (e.g., size and book-to-market effects) and the equity premium puzzle. Finally, we discuss how to evaluate portfolio performance, using the example of mutual funds. In particular, we analyze performance persistence, dynamic strategies, and impact of the survivorship bias.

There will be several home assignments and a written exam, which accounts for 60% of the grade. Investment Theory is a prerequisite for this course.

General references

[1] is the main textbook for the course, [2] is more advanced, while [3] describes theories and their empirical tests on the basic level. The copies of selected articles and book chapters will be distributed in the class. The course materials will be available at the website http://www.nes.ru/~agoriaev/.

1. Campbell, John W., Lo, Andrew W., and A. Craig MacKinlay, Princeton University Press, The Econometrics of Financial Markets.
2. Cochrane, John, Princeton University Press, Asset Pricing.
3. Haugen, Robert A., Prentice Hall, 2001, Modern Investment Theory (fifth edition).

Syllabus

1. Empirical tests of market efficiency: predictability of asset returns
q 1, ch. 2
q 2, ch. 20
q 3, ch. 24, 25

2. Event studies: methodology and applications
q 1, ch. 4

3. Empirical tests of mean-variance efficiency: asset pricing anomalies
q 1, ch. 5
q 2, ch. 20

4. Choice of factors in multi-factor asset pricing models
q 1, ch. 6
q 2, ch. 9

5. Consumption-based asset pricing models: the Hansen-Jagannathan bounds and the equity premium puzzle
q 1, ch. 8
q 2, ch. 21

6. Mutual fund performance evaluation: unconditional versus conditional and return-based versus portfolio-based approaches
q 1, ch. 6
q 3, ch. 11, 12