School of Business Masahiro Watanabe University of Alberta
A
DVANCEDS
EMINAR INF
INANCEI (F
INANCIALE
CONOMICS)
FIN 701
Fall 2019, 5:00pm-7:50pm, Mondays
COURSE DESCRIPTION
This course provides an introduction to the theory and the empirics of financial economics with a focus in asset pricing. Topics covered include utility and risk aversion, portfolio choice, stochastic discount factors, equilibrium and efficiency, mean-variance analysis, factor models, explaining puzzles, heterogeneous beliefs, learning, rational expectations equilibria, information/strategic trading/liquidity, and tests of asset pricing models.
COURSE MATERIALS
Textbooks
• (Required) Back, Kerry, 2017, Asset Pricing and Portfolio Choice Theory (2nd edition), Oxford University Press.
A free online copy is available from the above link via the UA library access (on campus or via VPN elsewhere). However, caution is needed as the previous online version had what appeared to be sporadic compilation errors (as of March 2018).
The current version should be better as the publisher vowed to make extensive corrections upon my feedback, but it is not confirmed to be error-free. I have put a clean print copy on reserve at the Winspear Business Library.
• (Recommended) Campbell, John Y., 2017, Financial Decisions and Markets: A Course in Asset Pricing, Princeton University Press.
• (Recommended) Cochrane, John, 2005, Asset Pricing (revised edition), Princeton University Press.
• (Optional) Duffie, Darrell, Dynamic Asset Pricing Theory (3rd edition), Princeton University Press.
• (Optional) Ingersoll, Jonathan E., 1987, Theory of Financial Decision Making, Rowman & Littlefield Publishers.
• (Optional) Huang, Chi-fu, and Robert H. Litzenberger, 1988, Foundations for Financial Economics, Elsevier Science Ltd.
Lecture Slides
Lecture slides will be posted on eClass at least two days before the class.
COURSE PREREQUISITES
None. However, knowledge of graduate-level microeconomics and undergraduate-level mathematics will certainly help. If you are unsure, read the first chapter of Back (2017). If you feel it challenging but interesting, you are welcome.
COMPUTING
It is strongly recommended that you be familiar with programmable statistical software of your choice. Example codes in this course will be given mainly in SAS, complemented by Matlab.
COMPUTING AND DATA ACCESS ON WRDS
If you do not have one yet, obtain an account at the Wharton Research Data Services (WRDS) by filling in their account request form. The website above provides a convenient user interface for downloading data, but their real strength is with the high- performance Linux computing cluster. In my experience, their servers are as fast as or faster than the national-level high-performance computing cluster at Compute Canada in processing SAS jobs.
EXERCISES
The exercises are designed to internalize the principles presented in the course. They will cover both theory and the empirics. The exercises should be completed individually. Each exercise is due at the beginning of the class on the due date.
PRESENTATION
Presentation is an important aspect of the dissemination of your research result. You are asked to present a paper of your choice from the Articles list (attached to the bottom of this syllabus) that is not marked by an asterisk symbol (*), i.e., one that is not designated as a reading in exercises. You should plan to spend about two, or at least one, minute(s) per slide. That is, for a 20 minute presentation, you should plan to present about ten slides.
However, it is always a good idea to have extra slides in case the audience asks you to go in more details (rare unless you have a really good fit with your audience). If it turns out that you have time after conclusion, it is fine to go for a slide on future agenda to remark what you have not done, why it is worth examining, and how it may be done. Do not waste your listeners’ time to just fill your allotted time, though. They will evaluate you based on efficiency. Prepare to be able to answer possible floor questions.
To avoid listening to the same paper twice, email me the choice of your presentation paper by the beginning of the class one week prior to the presentation. First come, first served: So, the earlier you claim a paper, the more likely you will get it. If someone already claimed the paper, I will ask you to present another paper.
Upload your slides on eClass (under Assignments\Presentation\) prior to class.
Deliver printed copies of your slides to me and your classmates in class. Also bring your laptop and record your comments as your classmates present. Send them to me immediately after the class. I will forward your feedback to the presenter anonymously.
EXAMS/TERM PAPER
There will be a midterm exam, and you have a choice of either taking a final exam or
completing a term paper. The midterm exam is given in class. The final exam is a comprehensive, take-home exam. You can bring in a calculator (with any memory cleared) and one letter-size, hand-written note sheet (both sides, no typing or copying) in the midterm exam. The midterm exam is closed everything else, including books, lecture slides, notes, computers, tablets, and cell phones.
If you choose the term paper option, you must submit a one-page proposal (double spaced in a 12-point font) by the beginning of the midterm exam and have it approved subsequently. The term paper can be empirical or theoretical, but should apply the principles or methodologies covered in class in some way. The term paper is due at the deadline of the final exam.
GRADES
The final letter grade is assessed on the basis of the exercises, exams/term paper, presentation, and class participation. The graded components receive the following weight in the final grade:
Total
Exercises 20%
Midterm Exam 30%
Presentation 5%
Final Exam/Term Paper 40%
Class participation 5% 100%
DEADLINES AND MISSED WORK
All assignments and exams must be turned in on time. Those turned in after the deadline will be penalized by 20% of assigned points for each 24 hours (or portion thereof) delay in submission. Work turned in after the delivery of the answer key will receive no credit.
Consistent with the University policy (summarized in the Class Record Book on the Registrars webpage), if you miss an exercise or an exam without acceptable excuse, a final grade will be computed using a raw score of zero for the work missed. Unacceptable reasons include, but are not limited to, personal events such as vacations, weddings, and travel arrangements. If you miss an exercise or an exam for an acceptable reason, you must present supporting documentation to me within two working days or as soon as you are able, having regard to the circumstances underlying the missed work. In the case of incapacitating illness, a medical note is not required. However, you can choose to submit one. You must complete a make-up exercise or exam, whose workload is equivalent to the amount of missed work.
RE-GRADING
Any re-grade request must be made in writing with a clear argument for additional credit.
The request must be submitted within a calendar week from the delivery of graded work in class (whether you pick it up or not), or before the final course grade is filed, whichever is earlier. The whole work will be re-graded, which can result in a lower score.
USE OF ELECTRONIC DEVICES
You may use electronic devices to take notes. However, your devices may not make noise for courtesy to your classmates. A mechanical keyboard may violate this requirement
unless it is silent. Another reason to discourage the use of a keyboard is that you will just scribe, rather than understand and internalize, what you hear. However, this policy does not apply if you require a keyboard for physical or medical reasons; please obtain my permission during the first two weeks of course (also see “DISABILITY ACCOMMODATIONS”).
CODE OF STUDENT BEHAVIOR
The Code of Student Behavior applies to all work in this course. Specific violations of the Code include, but are in no way limited to, the followings: 1) reference to or possession of any previous assignments, exams, or term papers from FIN 701 or its equivalent regardless of the course number; 2) copying another individual’s work, assignment, exam, or paper;
3) giving or receiving help on the assignment, exam, or term paper. If you are ever uncertain about what may or may not constitute a violation, please ask me.
The University of Alberta is committed to the highest standards of academic integrity and honesty. Students are expected to be familiar with these standards regarding academic honesty and to uphold the policies of the University in this respect. Students are particularly urged to familiarize themselves with the provisions of the Code of Student Behaviour (online at www.governance.ualberta.ca) and avoid any behaviour which could potentially result in suspicions of cheating, plagiarism, misrepresentation of facts and/or participation in an offence. Academic dishonesty is a serious offence and can result in suspension or expulsion from the University.
Recording in class is permitted only with the prior written consent of the professor or if recording is part of an approved accommodation plan.
DISABILITY ACCOMMODATIONS
Any student with a documented disability seeking academic adjustments or accommodations is requested to speak with me during the first two weeks of class. All such discussions will remain as confidential as possible. Students with disabilities will need to also contact the Accessibility Resources office (AR Exam Accommodations).
SYLLABUS POLICY
Policy about course outlines can be found in Course Requirements, Evaluation Procedures and Grading of the University Calendar.
OFFICE HOURS &CONTACT INFORMATION
For quick questions you are welcome to catch me after class. For longer questions, please make an appointment.
Masa Watanabe
Business Building, Room 3-30J Phone: 780-492-7343
email: [email protected] URL: http://www.ualberta.ca/~masa/
ADVANCED SEMINAR IN FINANCE I COURSE SCHEDULE
FIN 701 FALL 2019
Required readings are shown in bullet points.
A. Principles
1. Sep 9
a) Utility and Risk Aversion
• Back, Chapter 1
• Campbell, Section 1.5
• Ex. 1: Fama-French Factors and Portfolios (due Sep 23) 2. Sep 16
a) Portfolio Choice
• Back, Chapter 2
• Fama and French (1993)
• Ex. 2: Portfolio Formation (Size, due Oct 21) 3. Sep 23
a) Stochastic Discount Factors b) Equilibrium and Efficiency
• Back, Chapters 3 and 4
4. Sep 30
a) Mean-Variance Analysis
• Back, Chapter 5
• Ex. 3: Mean-variance Analysis (due Oct 21) 5. Oct 7
a) Factor Models
• Back, Chapter 6
• Ex. 4: Theory I (due Oct 28) No class Oct 14: Thanksgiving Day
6. Oct 21
a) Information, Strategic Trading, and Liquidity
• Back, Chapter 24 7. Oct 28
a) Rational Expectations Equilibria b) Review of the Theory exercise
• Back, Chapter 22
8. Nov 4
a) Midterm Exam (in-class)
b) One-page proposal due if you choose a term paper instead of a final exam
• Ex. 5: Asset Pricing Tests (due Nov 25) B. Applications
No class Nov 11-15: Remembrance Day & Reading Week
9. Nov 18
a) Midterm exam review b) Dynamic Asset Pricing
• Back, Chapter 10 10. Nov 25
a) Explaining puzzles
• Back, Chapter 11
• Choice of presentation paper due by email prior to class
11. Dec 2
a) Paper presentation b) Unfinished business
Final Exam/Term Paper: Time and place TBA
Disclaimer: There is not a one-to-one correspondence between the textbook material and the lecture material. As we proceed through the course, I may add, drop, or change the topics.
Articles
Articles marked by * are required or referenced in exercises, and cannot be used for the presentation assignment.
Anomalies
• (Size, value) *Fama, Eugene F., and Kenneth R. French, 1992, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47 (2), 427–465.
• (Three-factor model) *Fama, Eugene F., and Kenneth R. French, 1993, “Common risk factors in the returns on stocks and bonds,” Journal of Financial Economics 33, 3–56.
• (Five-factor model) Fama, Eugene F., and Kenneth R. French, 2015, “A five-factor asset pricing model,” Journal of Financial Economics 116, 1–22.
• (Five-factor model in international markets) Fama, Eugene F., and Kenneth R.
French, 2017, “International tests of a five-factor asset pricing model,” Journal of Financial Economics 123, 441–463.
• (Momentum) Jegadeesh, Narasimhan, and Sheridan Titman, 1993, “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,”
Journal of Finance 48 (1), 65–91.
• (Investment) Hou, Kewei, Chen Xue, and Lu Zhang, 2015, “Digesting Anomalies: An Investment Approach,” Review of Financial Studies 28 (3), 650-705.
• (Illiquidity) Amihud, Yakov, 2002, “Illiquidity and stock returns: cross-section and time-series effects” Journal of Financial Markets 5, 31–56.
• (Liquidity risk) Pastor, Lubos, and Robert F. Stambaugh, 2003, “Liquidity Risk and Expected Stock Returns,” Journal of Political Economy 111 (3), 642–685.
• (Time variation in liquidity risk premium) Watanabe, Akiko, and Masahiro Watanabe, 2008, “Time-Varying Liquidity Risk and the Cross Section of Stock Returns,” Review of Financial Studies 21 (6), 2449–2486.
• (Liquidity risk in corporate bonds) Acharya, Viral V., Yakov Amihud, and Sreedhar T.Bharath, 2013, “Liquidity risk of corporate bond returns: conditional approach,”
Journal of Financial Economics 110 (2), 358-386.
• (Equity issuance) Pontiff, Jeffrey, and Artemiza Woodgate, 2008, “Share Issuance and Cross-sectional Returns,” Journal of Finance 63 (2), 921–945.
• (Equity issuance in international markets) McLean, R. David, Jeffrey Pontiff, and Akiko Watanabe, 2009, “Share Issuance and Cross-Sectional Returns: International
Evidence,” Journal of Financial Economics 94 (1), 1-17.
• (Asset growth) Cooper, Michael J., Huseyin, Gulen, and Michael J. Shill, 2008,
“Asset Growth and the Cross-Section of Stock Returns,” Journal of Finance 63 (4), 1609–1651.
• (Asset growth in international markets) Watanabe, Akiko, Yan Xu, Tong Yao, and Tong Yu, 2013, “The asset growth effect: Insights from international equity markets,”
Journal of Financial Economics 108 (2), 529-563.
Methodology
• (Multivariate efficiency test) *Gibbons, Michael R., Stephen A. Ross, and Jay
Shanken, 1989, “A Test of the Efficiency of a Given Portfolio,” Econometrica 57 (5), 1121-1152.
• (Errors in variables) *Shanken, Jay, 1992, “On the Estimation of Beta-Pricing Models,” Review of Financial Studies 5 (1), 1-33.
• (Standard errors in panel) Petersen, Mitchell A., 2008, “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches” Review of Financial Studies 22 (1), 435–480.
• (Trade signing) Lee, Charles M.C., and Mark Ready, 1991 “Inferring trade directions from intraday data,” Journal of Finance 46, 733–746.
Strategic Trading Models
• (Monopolistic informed trader) Kyle, Albert S., 1985, “Continuous Auctions and Insider Trading,” Econometrica 53 (6), 1315–1335.
• (Multiple securities, multiple informed traders, static) Caballé, Jordi, Murugappa Krishnan, 1994, “Imperfect Competition in a Multi-Security Market with Risk Neutrality,” Econometrica 62 (3), 695–704.
• (Dynamic trading by multiple competing informed traders) Holden, Craig W., and Avanidhar Subrahmanyam, 1992, “Long-Lived Private Information and Imperfect Competition,” Journal of Finance 47 (1), 247–270.
• (Strategic liquidity traders) Admati, Anat R., and Paul Pfleiderer, 1988, “A Theory of Intraday Patterns: Volume and Price Variability”, Review of Financial Studies 1 (1), 3–40.
• (Optimizing liquidity traders) Bhushan, Ravi, 1991, “Trading Costs, Liquidity, and Asset Holdings,” Review of Financial Studies 4 (2), 343-360.
• (Volume) Foster, F. Douglas, and S. Viswanathan, 1990, “A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets,” Review of
Financial Studies 3 (4) 593–624.
• (Bid-ask spread) Glosten, Lawrence R., and Paul Mulgrom, 1985, “Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders,”
Journal of Financial Economics 14, 71–100.
Competitive Rational Expectations Models, Supply Shocks
• (Asset & information market equilibria under information asymmetry) Grossman, Sanford J., and Joseph E. Stiglitz, 1980, “On the Impossibility of Informationally Efficient Markets,” American Economic Review 70 (3), 393-408.
• (Noisy rational expectations equilibrium, NREE) Hellwig, Martin F., 1980, “On the Aggregation of Information in Competitive Markets,” Journal of Economic Theory 22, 477–498.
• (NREE with multiple securities) Admati, Anat R., 1985, “A Noisy Rational
Expectations Equilibrium for Multi-Asset Securities Markets,” Econometrica 53 (3), 629–658.
• (Hedging and crash) Gennotte, Gerard, and Hayne Leland, 1990, “Market Liquidity, Hedging, and Crashes,” American Economic Review 80 (5) 999–1021.
• (Non-informational trading and volume) Campbell, John Y., Sanford J. Grossman, and Jiang Wang, 1993, “Trading Volume and Serial Correlation in Stock Returns,”
Quarterly Journal of Economics, 108 (4), 905-939.
• (Overlapping generations model with supply shocks) Spiegel, Matthew, 1988, “Stock Price Volatility in a Multiple Security Overlapping Generations Model,” Review of Financial Studies 11 (2), 419–447.
• (Multiple security NREE in overlapping generations) Watanabe, Masahiro, 2008,
“Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry,” Journal of Finance 63 (1), 229–272.
• (Information acquisition in dynamic markets) Avdis, Efstathios, 2016, “Information Trade-offs in Dynamic Financial Markets,” Journal of Financial Economics 122, 568-584.
Disclosure
• (Disclosure and returns) Shin, Hyun Song, 2003, “Disclosures and Asset Returns,”
Econometrica 71 (1), 105-133.
• (Strategic disclosure and return autocorrelation) Goto, Shingo, Masahiro Watanabe, and Yan Xu, 2009, “Strategic Disclosure and Stock Returns: Theory and Evidence from US Cross-Listing,” Review of Financial Studies 22 (4), 1585–1620.
Ambiguity
• (Disclosure and ambiguity aversion) Caskey, Judson A., 2009, “Information in Equity Markets with Ambiguity-Averse Investors,” Review of Financial Studies 22 (9), 3595–3627.
• (Learning under ambiguity) Epstein, Larry G., and Martin Schneider, 2008,
“Ambiguity, Information Quality, and Asset Pricing,” Journal of Finance 63 (1), 197–228.
• (Recursive utility with smooth ambiguity aversion) Ju, Nengjiu, and Jianjun Miao, 2012, “Ambiguity, Learning, and Asset Returns,” Econometrica 80 (2), 559-591.
Macro Finance
• (Long-run risk) Bansal, Rabi, and Amir Yaron, 2004, “Risks for Long Run: A
Potential Resolution of Asset Pricing Puzzles,” Journal of Finance 65 (4), 1481-1509.
• (Investment pricing in two-sector general equilibrium) Papanikolaou, D., 2011,
“Investment shocks and asset prices,” Journal of Political Economy 119, 639-685.
• (Investment pricing under flexible capital utilization) Garlappi, L., and Z. Song, 2017,
“Capital utilization, market power, and the pricing of investment shocks,” Journal of Financial Economics 126, 447-470.
