Econometrics of Financial Markets. Module 3, 2006/7
Syllabus: in English
Lecture slides: 2-4 tests of return
predictability, 5 event study
analysis, 6-7 CAPM, 8-10 multifactor models,
11-14 mutual funds
Home assignments: HA1
with data, HA2, HA3
Last-year materials
Lecture
notes and slides
Tables discussed in the
lectures: 4-5, 7, 8, 9, 11, 12, 13
Home assignments: HA1
with data, HA2, HA3
with data
·
Use one-year GKO YTM as a risk-free rate.
·
Note that stock prices are in dollars, whereas GKO
rate is annualized and in rubles. Do not forget to put the stock and index
returns into one frequency and currency!
Russian financial data:
·
Basic information on
47 most liquid Russian stocks: id, name, # issued stocks, dividends
·
Close prices of 47 most
liquid Russian stocks in 1999-2004 (daily, in rubles)
·
Macroeconomic
data, including Euro and dollar exchange rates, MIACR (interbank credit
rates), money balances, MICEX, S&P/RUX, and Cbond indices, and risk-free
(GKO-OFZ) rates of different maturities from 01/1999 to 12/2004 (daily)
o
Note: you are advised to take GKO 30-day rate (std,
column P) as a risk-free rate. It is computed as annualized yield to maturity
of GKO with the smallest maturity above 30 days (this is a standard approach).
o
Note: you are advised to annualize all returns for the
analysis (in order not to get confused, e.g., with GKO rate and stock returns).
Supplementary resources
·
Investment company institute and 2006 factbook:
extensive information about the
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Surveys
·
Megginson, 2001, Corporate Finance
Theory, ch. 3.
·
Cochrane, 1999,
New facts in finance, Economic Perspectives. A survey of recent developments in the
empirical finance.
·
Schwert,
2003, Anomalies & Market Efficiency, ch.15 in the Handbook of the Economics
of Finance, Ed.
by G.M. Constantinides, M. Harris, and R. Stulz. An excellent survey of
different anomalies and their interpretation in the context of market
efficiency and behavioral theories.
Lecture 1: Introduction
·
Rubinstein, 2000, Rational
markets: Yes or no? The affirmative case, lecture 1. Rational vs.
behavioral explanations of the stylized facts on financial markets.
Lectures 2-4: Tests of return predictability
·
·
Cuthbertson, 1996, Quantitative
Financial Economics, ch. 6.
·
Harvey,
1991, The world price of covariance risk, Journal of Finance 46, 111-157, lecture 3. Tests of stock return predictability
at the country level.
·
Pesaran
and Timmerman, 1995, Predictability of stock returns: Robustness and economic
significance, Journal of Finance 50, 1201-1228, lecture 3. Testing profitability of the
trading strategies based on return predictability.
·
Goriaev
and Zabotkin, 2006, Risks of investing in the Russian stock market: Lessons of
the first decade, Emerging Markets Review 7(4), 380-397, seminar 1. Summary statistics of the Russian stock market.
·
Hall and Urga,
2002, Testing for ongoing efficiency in the Russian stock market, seminar
1. Modeling time-varying parameters via Kalman filter.
Lecture 5: Event studies
·
·
Asquith
and Mullins, 1983, The impact of initiating dividend payments on shareholders’
wealth, Journal of Business 83, 77-96, lecture 5. The classical event study.
·
De Bondt and
Thaler, 1985, Does the stock market overreact? Journal of Finance 40, 793-805, seminar 2. Applying the event
study methodology to examine long-run price reversals.
·
Fama,
1998, Market efficiency, long-term returns, and behavioral finance, Journal of
Financial Economics 49, 283-306, seminar 2. Discussion of long-run event
studies and their results in the context of market efficiency and behavioral
finance.
·
Bradfield,
2003, On estimating the beta coefficient, Investment Analysts Journal 57, 48-53, lecture 5 and seminar 2. An
overview of different methods for beta adjustment for illiquid stocks.
Lectures 6-7: Tests of CAPM
·
·
Fama and Macbeth, 1973,
Risk, return, and equilibrium: Empirical tests, Journal of Political Economy
81, 607-636,
lecture 6. The classical article with
cross-sectional test of CAPM.
·
Fama and French,
1992, The cross-section of expected stock returns, Journal of Finance 47,
427-465,
lecture 7. The famous “beta is dead” article
that discusses how market beta, size, and book-to-market factors explain
cross-sectional differences in stock returns and proposes a three-factor (aka Fama-French) model.
·
Ferson
and Harvey, 1998, Fundamental determinants of national equity market returns: A
perspective on conditional asset pricing, Journal of Banking and Finance 21,
1625-1665, lecture 7. A conditional test of CAPM on the country level.
·
Rouwenhorst,
1999, Local return factors and turnover in emerging stock markets, Journal of
Finance 54, 1439-1464, seminar 3. Discussion of factors driving cross-sectional differences
in stock returns in emerging markets.
·
Fama
and French, 1998, Value versus Growth: International Evidence, Journal of
Finance 53, 1975-1999, seminar 3. Discussion of value premiums across developed countries.
Lectures 8-10: Multifactor
models
·
·
Chen, Roll, and Ross,
1986, Economic forces and the stock market, Journal of Business 86, 383-403, lecture 9. Basic article on
multifactor models with macroeconomic factors.
·
Fama
and French, 1993, Common risk factors in the returns on stocks and bonds,
Journal of Financial Economics 33, 3-56, lecture 10. Time-series analysis of a model
with three stock factors and two bond factors.
·
Fama and
French, 1996, Multifactor explanations of asset pricing anomalies, Journal of
Finance 51, 55-84,
seminar 4. The three-factor Fama-French model explains all pricing anomalies
but momentum.
·
Chan,
Karceski, and Lakonishok, 1998, The risk and return from factors, Journal of
Financial and Quantitative Analysis 33, 159-188, seminar 4. Joint analysis of various
(statistical, macroeconomic, and fundamental) risk factors.
Lectures 11-14: Evaluation of
performance and strategies of mutual funds
·
Goriaev, 2002, On
the behavior of mutual fund investors and managers, PhD Dissertation, Chapters
1-2, lecture
11. Basic information about the structure of the mutual fund industry and
introduction to the literature on mutual funds.
·
Brown and Goetzmann,
1995, Performance persistence, Journal of Finance 50, 679-698, lecture 12. Analysis of mutual
fund survival and performance persistence.
·
Carhart, 1997, On persistence in
mutual fund performance, Journal of Finance 52, 57-82, lecture 12. Analysis of mutual
fund performance persistence using a four-factor model.
·
Ferson and Schadt, 1996,
Measuring fund strategy and performance in changing economic conditions, Journal
of Finance 51, 425-461, lecture 13. Conditional approach to performance
measurement.
·
DeRoon and Nijman,
2001, Testing for mean-variance spanning: A survey, Journal of Empirical
Finance 8/2, 111-156,
a survey of mean-variance spanning tests.
·
Wermers,
2000, Mutual fund performance:
An empirical decomposition into stock-picking talent, style, transactions
costs, and expenses, Journal of Finance 55, 1655-1695, lecture 12. Portfolio-based approach to mutual fund performance measurement.
·
Gruber, 1996, Another puzzle: The
growth in actively managed mutual funds, Journal of Finance 51, 783-810, seminar 5. This article was prepared for the presidential
address at the 1996 AFA conference. The main question is why active mutual
funds grow so fast despite unimpressive average performance.
·
Chevalier
and Ellison, 1997, Risk Taking by Mutual Funds as a Response to Incentives,
Journal of Political Economy 105, 1167-1200, lecture 14. Estimating the flow-performance
relationship, resulting risk-taking incentives for mutual funds, and response
to these incentives by fund managers.
Additional sources
Lecture notes of Eric Zivot
(U. of Washington) on definitions
and properties of financial asset returns, return
predictability, nonsynchronous
trading and bid-ask spread, and factor
models