Schedule 

 

This document is updated on Oct. 21th at 8:00PM.

 

The following represents a tentative outline of topics, associated readings and approximate dates for the course:

The goal here is to set up expectations for the course. We will go over what I expect from the students and what students should expect from me. Trading game will be discussed in great details. We will also go through institutional details on trading. If you want to know more, please read extra papers (below) or take Prices and Markets course. 

• Introductions, Course Outline, Requirements, Resources
• Course Trading Game: Rules and Requirements
• Taxonomy of Securities and Markets
• Securities Exchanges and Markets
  • Trading Arrangements: Orders, Margin Trading, Short Sales
  • Brokers' Services and Costs
• New economy and investment industry.

Readings:

• Walter Bagehot, "The Only Game in Town," Financial Analysts Journal, 1971. 
• Robert Sales, "ECNs: The Fight To Attract Listed Equities Order Flow", December 10, 2001.
• "Island Tops list as largest ECN". Island press release, Jan.9, 2002.
• EXTRA Ananth Madhavan, "Market microstructure: A survey," Journal of Financial Markets, vol. 3(3), Pages 205-258. 
• Satyajit Das, "e-Business and Wholesale Financial Services," Futures and Options World, May, June, July, 2000. This is series of three short but informative papers assessing what 'new economy' is with respect to financial services.
• EXTRA The Internet and Financial Services Report, Morgan-Stanley-Dean-Witter report on Internet and Financial Services. 

• EXTRA Robert J. Gordon, "Does the "New Economy" Measure up to the Great Inventions of the Past?", NBER Working Paper No. W7833, Issued in August 2000.

What performance should we expect from major markets over the next twenty years?Can we gain anything by international diversification? How to build workable portfolio in practice?

• Representation of risk by variance
• Risk tolerance and asset allocation
• Portfolio optimization
• Domestic diversification
• Index funds
• International Diversification
• Pitfalls in Portfolio constructions
• Black-Litterman Model

Readings:

• X Jeremy J. Siegel, "Stocks and Bonds since 1802," chapter 1 in  Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, McGraw-Hill, pp. 3-24.
• X William N. Goetzmann and Philippe Jorion, “A Century of Global Stock Markets,” Journal of Finance 1999
• "Great Expectations", The Economist, Jan 31st, 2002 .
• Peter Coy, "Economics: How Risky Is the Risk Premium?" Business Week, Dec. 25, 2000.
• XSteven L. Heston and K Geert Rouwenhorst, "Industry and country effects in international stock returns," Journal of Portfolio Management; New York; Spring 1995.
• K Geert Rouwenhorst, "European Equity Markets and EMU: Are the Differences Between Countries Slowly Disappearing?", Yale SOM Working Paper.
• XStefano Cavaglia, "The increasing importance of industry factors," Financial Analysts Journal, Charlottesville; Sep/Oct 2000; Vol. 56, Iss. 5; pg. 41, 14 pgs
• Jeff Diermeier; Bruno Solnik, "Global pricing of equity," Financial Analysts Journal; Charlottesville; Jul/Aug 2001
• XJohn Y. Campbell, Martin Lettau, Burton G. Malkiel, Yexiao Xu, "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, 2001 .
• Brad Barber and Terrance Odean, "The Courage of Misguided Convictions," Financial Analysts Journal, November/December 1999, 41-55. 
• XPhilippe Jorion, "Portfolio Optimization in Practice," Financial Analysts Journal, Charlottesville; Jan/Feb 1992; Vol. 48, Iss. 1; pages 68-75.
• Robert Litterman and Kurt Winkelmann, Goldman Sachs, January 1998, Estimating Covariance Matrices.
• Andrew Bevan and Kurt Winkelmann, Goldman Sachs, June 1998, Using the Black-Litterman Global Asset Allocation Model: Three Years of Practical Experience.
• G. Le and Robert Litterman, Goldman Sachs, December 1999, The Intuition Behind the Black-Litterman Model Portfolios.

The case is due at  am on .

• Questions are HERE.

Expected returns

• Mean-variance perspective on TAA
• Are expected returns predictable?
• US and International evidence. 
• Statistical and econometric issues

Readings

• XCampbell R. Harvey and Wayne Ferson, "Sources of Predictability in Portfolio Returns," Financial Analysts Journal May/June (1991): 49-56.
• XCampbell R. Harvey and Wayne Ferson, "The Risk and Predictability of International Equity Returns," Review of Financial Studies 6 (1993) 527- 566.
• XDumas B. and B. Solnik, 1995, ''The world price of foreign exchange risk'', Journal of Finance, 50, 445-479..
• Campbell R. Harvey, "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies (1995): 773-816.
• EXTRA: Evelina M. Tainer, "Using Economic Indicators to improve investment analysis." John Wiley & Sons, Inc. 1998 (Second Edition)
• EXTRA Harvey Cox, "The Market as God", The Atlantic Monthly, March 1999. I do not agree with this paper, but it does make a valid point (markets are not always right) and argue this point well.

  Session 6: Case: Fast Forward Forecasting  is due! 

Long-horizon stock return forecasting using dividend yields.  Written by Prof. W. Goetzmann (Yale SOM).

Software needs: SPSS, SAS or any other statistical package for regressions and possibly bootstrapping capabilities. 

Data needs: time-series of annual returns to U.S. asset classes from Ibbotson Associates. Data will be posted in due course.

Reading 

• Michael Rozeff, "Dividend Yields are Equity Premiums," Journal of Portfolio Management, 1984-1985, v11(1) 68-75. 

• William N. Goetzmann, Philippe Jorion, "Testing the Predictive Power of Dividend Yields," Journal of Finance, vol. 48(2), 1993

  
  
  

   

We will discuss this case in the class briefly, however, our main topic is 

Comovement, Volatility, Skewness

Topics:

• Econometric techniques used for modeling volatilities and correlations. 

• Statistical properties of volatility

• Models of conditional volatility: ARCH and GARCH models 

• Other forecasting methods: chaos, genetic algorithms, neural nets, etc.( I am quite pessimistic re. those, but so many people are using them...) 

• Role of Uncertainty

• Skewness 

Readings:

• XCampbell R. Harvey, "Forecasting International Equity Correlations," with Claude Erb and Tadas Viskanta, Financial Analysts Journal (1994): November/December 32-45.

• Campbell R. Harvey, "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies (1995): 773-816.

• Handouts

• Campbell R. Harvey,"Autoregressive Conditional Skewness," with Akhtar Siddique, Journal of Financial and Quantitative Analysis 1999

• XJoseph Chen , Harrison G. Hong and Jeremy C. Stein," Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices", MIT Working paper.

Asset Pricing Models

• State of asset pricing theory (CAPM, APT, international asset pricing models)
• Identifying factors
• Factors vs. attributes

Readings:

• Eugene F. Fama and Kenneth R. French, 1992, "The Cross-Section of Expected Stock Returns" Journal of Finance 47, 427-465. .
• XEugene F. Fama and Kenneth R. French, 1993, "Common Risk Factors in the Returns on Stocks and Bonds," Journal of Financial Economics 33, 3-56.
• Campbell R. Harvey, "Conditioning Variables and the Cross-Section of Stock Returns," with Wayne Ferson, Journal of Finance 1999, 54 1325-1360. (P57) 
• XKent Daniel and Sheridan Titman, 1997, "Evidence on the Characteristics of Cross-Sectional Variation in Stock Returns" Journal of Finance 52, 1-33.
• Nai-Fu Chen, Richard Roll, Stephen A. Ross, 1986, "Economic Forces and the Stock Market,", The Journal of Business, Vol. 59, No. 3. (Jul., 1986), pp. 383-403.
• Barr Rosenberg, Walt McKibben, 1973, "The Prediction of Systematic and Specific Risk in Common Stocks," JFQA, vol8(2), pp. 317-333

Dimensional Fund Advisors case.

The case is due at ....

• Questions are HERE. 

Session 14. Behavioral Finance and Investments (Feb.27)

Slides are here 

• Prospect Theory

• Overconfidence

• Framing

• Investor Sentiment

• Implications for Investment Industry

• XBrad Barber and Terrance Odean, "The Courage of Misguided Convictions," Financial Analysts Journal, 1999, 41-55. 
• Robert J. Shiller, "Human Behavior and the Efficiency of the Financial System," in Handbook of Macroeconomics (John B. Taylor and Michael Woodford, editors)
• William Goetzmann, Massimo Massa and Geert Rouwenhorst, Behavioral Factors in Mutual Fund Flows Yale University Working Paper, 2000. 
• Mark Hulbert, "How Dot-Com Makes a Company Smell Sweet", NY Times, Aug. 15, 1999
• EXTRAAndrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance, Oxford University Press, 2000.

Each group has 10 min. (SHARP!) to present their investment idea (+3-5 min for questions).

Try to convince me and your colleagues that your idea is worth investing money into

Investment project is due in MAY.