Econometrics of Financial Markets. Module 3, 2006/7

Syllabus: in English

Lecture notes

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

Exam

 

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!

Exam with solutions

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 US mutual fund industry

·        Íàöèîíàëüíàÿ Ëèãà Óïðàâëÿþùèõ è InvestFunds: èíôîðìàöèÿ î ðîññèéñêèõ ÏÈÔàõ

 

Readings (required, supplementary, and advanced)

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

·        Campbell, Lo, and MacKinlay, 1997, The Econometrics of Financial Markets, ch. 2 “The Predictability of Asset Returns”.

·        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

·        Campbell, Lo, and MacKinlay, 1997, The Econometrics of Financial Markets, ch. 4 “Event-Study Analysis”.

·        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

·        Campbell, Lo, and MacKinlay, 1997, The Econometrics of Financial Markets, ch. 5 “The Capital Asset Pricing Model”.

·        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

·        Campbell, Lo, and MacKinlay, 1997, The Econometrics of Financial Markets, ch. 6 “Multifactor Pricing 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