3-110L Carol Simon Hall
Secretary: Kathleen Madsen, Dewey 3-110M, 275-8127
This course examines a variety of econometric methods for addressing substantively
important questions in financial research. We will have one class meeting per
week. Grading will be flexible - students will have input to determine what
type of evaluation procedure will be used. There will be several homework problems
assigned throughout the quarter. One of the homework assignments will involve
replicating and extending some empirical results that are reported in some of
the papers we are going to be discussing in class (or in another paper that
we mutually agree on).
This course will cover material on efficient markets, CAPM tests, interest
rates, inflation, time-varying conditional expected returns and volatility,
and liquidity. Emphasis will be on the application of empirical methods to financial
The reading assignments will be announced in class and will more or less follow
the sequence given below. You will be provided with copies of required readings
(shown with an asterisk * below). I have included additional references, which
are not required, for students who want more information on particular topics.
These are not on reserve, but copies of these journals are available in the
Management Library (and they are available electronically through the Management
Library). The recommended books for the course are:
- John H. Cochrane, Asset Pricing, Princeton University Press, revised ed.,
- John Y. Campbell, Andrew W. Lo, and A. Craig MacKinlay, The Econometrics
of Financial Markets, Princeton University Press, 1996 (hereafter CLM).
- James D. Hamilton, Time Series Analysis, Princeton University Press, 1994
I will put these books on reserve in the library.
There will be several guest lecturers (other faculty members and Ph.D. students).
In addition, I will ask each student who is registered for the course to be
responsible for leading the discussion of one or more related papers during
some part of the course. Of course, I will be available to help you plan your
lecture, and I will supplement what you say in class. You should find a topic
that interests you and volunteer early.
This course is intended to help you overcome fear of using new methods to
analyze problems that interest you. If you have a specific topic or area of
interest that is not currently on the outline, I would be glad to consider
adding/substituting that material into the course.
Course Information on the
Wide World Web (WWW)
Most of the materials for this course will be posted
on the home page for this course. For example, I plan to post copies of the assignments as HTML and/or as Adobe Acrobat PDF files (so they can be viewed and printed from a microcomputer attached to the WWW). In addition, I will use the home page for posting information about future class meetings, etc., so you should check regularly to see if
new information is available. I have also created a public folder on the Simon School mail system. I will try to post announcements there, too.
I. Efficient Markets
- *Schwert, G. William, Anomalies and Market Efficiency,
Handbook of the Economics of Finance, eds. George Constantinides, Milton
Harris, and René Stulz, North-Holland (2003).
- *Huberman, Gur, and G. William Schwert, Information
Aggregation, Inflation, and the Pricing of Indexed Bonds, Journal
of Political Economy, 93 (February 1985) 92-114.
- *Kothari, SP, Capital Markets Research in Accounting,
Journal of Accounting & Economics, 31 (September 2001) 105-231.
- *Lakonishok,Josef and Theo Vermaelen, Anomalous
price behavior around repurchase tender offers, Journal of Finance,
45 (June 1990) 455-477.
- *Kothari, S., Lewellen, J., Warner, J.,Stock Returns,
Aggregate Earnings Surprises, and Behavioral Finance, Journal of
Financial Economics, 79 (2006) 537-568.
- Abel, Andrew B. and Frederic S. Mishkin, On the Econometric Testing of
Rationality-Market Efficiency, Review of Economics and Statistics,
65 (1983) 318-323.
- Acharya, Sankarshan, Value of Latent Information:
Alternative Event Study Methods, Journal of Finance, 48 (March
- Barber, Brad and Lyon, John, Detecting long-run
abnormal stock returns: The empirical power and specification of test-statistics,
Journal of Financial Economics, 43 (1997) 341-372.
- Barber, Brad and Lyon, John, Detecting abnormal
operating performance: The empirical power and specification of test statistics,
Journal of Financial Economics, 41 (1996) 359-399.
- Brown, Stephen J., and Jerold B. Warner, Measuring Security Price Performance,
Journal of Financial Economics, 8 (1980) 205-258.
- Brown, Stephen J., and Jerold B. Warner, Using Daily Stock Returns: the
Case of Event Studies, Journal of Financial Economics, 14 (March
- Eckbo, B. Espen, Vojislav Maksimovic, and Joseph Williams,
Consistent Estimation of Cross-Sectional Models in Event Studies, Review
of Financial Studies, 3 (1990) 343-365.
- Fama, Eugene F., Foundations of Finance, Chapter 5, 1976.
- Fama, Eugene F., Efficient Capital Markets II,
Journal of Finance, 46 (December 1991) 1575-1617.
- Fama, Eugene F., Market Efficiency, Long-term Returns, and Behavioral
Finance, Journal of Financial Economics, 49 (September 1998) 283-306.
- Hausman, Jerry A., Andrew W. Lo, and A. Craig MacKinlay, An Ordered Probit
Analysis of Transaction Stock Prices, Journal of Financial Economics,
31 (1992) 319-380.
- Kothari, S.P., and Jerold B. Warner, Measuring Long-Horizon Security Price
Performance, Journal of Financial Economics, 43 (1997) 301-339.
- Lo, Andrew W. and A. Craig MacKinlay, Data-snooping
Biases in Tests of Financial Asset Pricing Models, Review of Financial
Studies, 3 (1990) 431-467.
- Prabhala, N.R., Conditional Methods in Event Studies and an Equilibrium
Justification for Standard Event-Study Procedures, Review of Financial
Studies, 10 (1997) 1-38.
- Schwert, G. William, The Adjustment of Stock Prices
to Information About Inflation, Journal of Finance, 36
(March 1981) 15-29.
II. Asset Pricing
- *Campbell, John Y., Asset Pricing at the Millennium,
Journal of Finance, 55 (2000) 1515-1567.
- *Cochrane, John H., Financial Markets and the Real Economy, NBER Working
Paper 11193, 2006.
- *Lewellen, Jonathan and Stefan Nagel, The Conditional CAPM Does Not Explain
Asset-Pricing Anomalies, Journal of Financial Economics, 82 (2006)
- *Lewellen, Jonathan, Stefan Nagel, and Jay Shanken, A Skeptical Appraisal
of Asset Pricing Tests, unpublished paper, Dartmouth College, Stanford University,
and Emory University, 2006.
- *Kandel, Eugene and Neil D. Pearson, Differential
Interpretation of Public Signals and Trade in Speculative Markets, Journal
of Political Economy, 103 (Aug., 1995) 831-872.
- *Francis, J., R. LaFond, P. Olsson, and K. Schipper, 2005, The Market Pricing of Accruals Quality, Journal of Accounting and Economics 39 (2), pp. 295-327.
- *Core, J., W. Guay, and R. Verdi, 2008, Is Accruals Quality a Priced Risk Factor, forthcoming Journal of Accounting and Economics.
- JC, Chapters 5, 9, 10-12.
- Acharya, Viral V., and Pedersen, Lasse Heje, Asset
pricing with liquidity risk, Journal of Financial Economics,
77 (August 2005) 375-410.
- Brennan, Michael J., Tarun Chordia, and Avanidhar Subrahmanyam, Alternative
Factor Specifications, Security Characteristics, and the Cross-Section of
Expected Stock Returns, Journal of Financial Economics, 49 (1998)
- Chordia, Tarun, Roll, Richard and A. Subrahmanyam, Commonality in liquidity,
Journal of Financial Economics, 56 (2000) 3-28.
- Fama, Eugene, Foundations of Finance, Chapters 7,
8, 9, 1976.
- Fama, Eugene F. and Kenneth R. French, The Cross-Section of Expected Stock
Returns, Journal of Finance, 47 (1992) 427-465.
- Fama, Eugene F. and Kenneth R. French, Multifactor
Explanations of Asset Pricing Anomalies, Journal of Finance,
60 (March 1996) 55-84.
- Fama, Eugene F. and Kenneth R. French,
Dissecting Anomalies, manuscript, 2007.
- Gibbons, Michael, Stephen Ross, and Jay Shanken, A
Test of the Efficiency of a Given Portfolio, Econometrica, 57
- Roll, Richard, A Critique of the Asset Pricing Theory's Tests: Part I,
Journal of Financial Economics, 4 (1977) 129-176.
III. Time-Varying Expected Returns
- *JH, Chap. 14 (very good exposition on GMM).
- *CLM, Chaps. 2 and 7.
- *JH, Chaps. 15 and 17.
- *Stambaugh, Robert F., Predictive Regressions,
Journal of Financial Economics, 54 (December 1999) 375-421.
- *Campbell, John Y. and John H. Cochrane, By Force of Habit: A Consumption-Based
Explanation of Aggregate Stock Market Behavior, Journal of Political
Economy, 107 (April 1999) 205-251.
- *Lettau, Martin, and Sydney Ludvigson, Resurrecting
the (C)CAPM: A Cross-Sectional Test when Risk Premia are Time Varying,
Journal of Political Economy, 109 (2001) 1238-1286.
- *Yogo, Motohiro, A Consumption-Based Explanation of
Expected Stock Returns, Journal of Finance, 61 (2006) 539-580.
- CLM, Chaps. 8, 10, and 11.
- Bansal, Ravi and Amir Yaron, Risks for the Long
Run: A Potential Resolution of Asset Pricing Puzzles, Journal of
Finance, 59 (2004) 1481-1509.
- Campbell, John, Stock Returns and the Term Structure, Journal of Financial
Economics, 18 (June 1987) 373-399.
- Campbell, John Y., A Variance Decomposition for Stock Returns, The
Economic Journal, 101 (March 1991) 157-179.
- Campbell, John Y. and John Ammer, What Moves the Stock
and Bond Markets? A Variance Decomposition for Long-term Asset Returns,
Journal of Finance, 48 (1993) 3-38.
- Campbell, John Y. and Robert Shiller, Cointegration and Tests of Present
Value Models, Journal of Political Economy, 95 (1987) 1062-1088.
- Campbell, John Y. and Robert Shiller, The Dividend-Price
Ratio and Expectations of Future Dividends and Discount Factors, Review
of Financial Studies, 1 (Fall 1988) 195-228.
- Campbell, John Y. and Motohiro Yogo, Efficient Tests of Stock Return Predictability,
Journal of Financial Economics, 81 (2006) 27-60.
- Casella, G. and E. I. George, Explaining the Gibbs Sampler, The American
Statistician, 46 (1992) 167-174.
- Cochrane, John H., The Dog That Did Not Bark: A
Defense of Return Predictability, Review of Financial Studies,
- Cochrane, John H., Financial Markets and the Real Economy, manuscript, 2006.
- Johnson, Timothy, Rational Momentum Effect, Journal of Finance,
57 (2002) 585-608.
- Kan, Raymond and Chu Zhang, GMM Tests of Stochastic Discount Factor Models
with Useless Factors, Journal of Financial Economics, 54 (October
- Lettau, Martin and Sydney Ludvigson, Consumption,
Aggregate Wealth, and Expected Stock Returns, Journal of Finance,
56 (2001) 815-849.
- Pagan, Adrian, Econometric Issues in the Analysis of Regressions with
Generated Regressors, International Economic Review, 25 (1984) 221-248.
- Richardson, Matthew and James H. Stock, Drawing Inferences from Statistics
Based on Multi-year Asset Returns, Journal of Financial Economics,
25 (December 1990) 323-348.
- Stambaugh, Robert F., Analyzing Investments Whose Histories Differ in
Length, Journal of Financial Economics, 45 (September 1997) 285-331.
- Zhang, Lu, The Value Premium, Journal of Finance,
60 (2005) 67-103.
IV. Interest Rates and Inflation
- *JH, Chap. 4 (read earlier chapters if you have not taken APS 420).
- *Nelson, Charles R., and G. William Schwert, On Testing
the Hypothesis that the Real Rate of Interest is Constant, American
Economic Review, 67 (June 1977) 478-486.
- *Bekaert, Geert, Robert J. Hodrick and David A. Marshall, On
biases in tests of the expectations hypothesis of the term structure of
interest rates, Journal of Financial Economics, 44 (June 1997)
- *Hamilton, James D., A New Approach to the Economic
Analysis of Nonstationary Time Series and the Business Cycle, Econometrica,
57 (1989) 357-384.
- Gray, Stephen F., Modeling the conditional distribution
of interest rates as a regime-switching process, Journal of Financial
Economics, 42 (September 1996) 27-62.
- Schwert, G. Wiliam, Effects of Model Specification on Tests for
Unit Roots in Macroeconomic Data, Journal of Monetary Economics, 20 (July 1987) 73-103.
V. Time-Varying Volatility
- Campbell, John, Martin Lettau, Burton Malkiel, and Yexiao Xu, Have
Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic
Risk, Journal of Finance, 56 (2001) 1-43.
A. ARCH & GARCH models (and their relatives)
- *CLM, Chap. 12.2.
- *JH, Chap. 21.
- *Hentschel, Ludger, All in the Family: Nesting
Symmetric and Asymmetric GARCH Models, Journal of Financial
Economics, 39 (September 1995) 71-104.
- *Schwert, G. William, Why Does Stock Market Volatility
Change Over Time? Journal of Finance, 44 (December
- Bollerslev, Tim, Robert F. Engle, and Daniel B. Nelson, ARCH
Models, Handbook of Econometrics, Vol. IV, Chap. 49, Elsevier,
- French, Kenneth, G. William Schwert and Robert Stambaugh, Expected
Stock Returns and Volatility, Journal of Financial Economics,
19 (September 1987) 3-29.
- Harvey, Campbell R., Time Varying Conditional Covariances in Tests
of Asset Pricing Models, Journal of Financial Economics,
24 (October 1989) 289-317.
- Schwert, G. William and Paul Seguin, Heteroskedasticity
in Stock Returns, Journal of Finance, 45 (September
B. Nonparametric and regime-switching models
- *CLM, Chap. 12.3.
- *JH, Chap. 22.
- *Turner, Christopher M., Richard Startz and Charles R. Nelson, A Markov
Model of Heteroskedasticity, Risk and Learning in the Stock Market,
Journal of Financial Economics, 25 (November 1989) 3-22.
- *Pagan, Adrian R. and G. William Schwert, Alternative
Models for Conditional Stock Volatility, Journal of Econometrics,
45 (July 1990), 267-290.
- Hamilton, James D. and Raul Susmel. Autoregressive Conditional Heteroskedasticity
and Changes in Regime, Journal of Econometrics, 64 (1994) 307-333.
- Schwert, G. William, Business Cycles, Financial
Crises and Stock Volatility, Carnegie-Rochester Conference Series
on Public Policy, 31 (Autumn 1989) 83-125.
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Last Updated on 5/8/2008