Empirical Methods: Quantitative Methods in Finance (FINA 8373)

This course is designed to help students bridge the gap between theoretical financial models and the (real) world of applied finance. It is primarily intended for second-year PhD students in Finance. The objective of the course is to expose students to the statistical/econometric methodologies as well as important economic issues in finance. The prerequisites are doctoral-level classes in finance theory and in econometrics, plus proficiency with computers. At the end of the course, students should know how to access various sources of financial data, design empirical tests of theoretical issues and apply basic programming skills to analyze the data and arrive at conclusions.

Office Hours:
Tuesdays and Thursdays: By appointment.

Required Textbook:
The Econometrics of Financial Markets , Campbell, J.Y., A.W. Lo and A.C. MacKinlay (CLM), Princeton University Press, Princeton, 1997.

Other Textbooks:
Market Models: A Guide to Financial Data Analysis, By C. Alexander, NY: JohnWiley, 2003.
Asset Pricing, by J.H. Cochrane (JC), Princeton, NJ: Princeton University Press, 2001.
Econometric Analysis , by William H. Greene, Prentice Hall. (Almost any edition should be fine.)
Time Series Analysis, by J. D. Hamilton, Princeton University Press, 1994.
Quantitative Financial Economics, by K. Cuthbertson and D. Nitzche, NY: John Wiley, 2005.
Econometric Analysis of Cross Section and Panel Data, by J. Wooldridge, MIT Press, 1999.

Required Articles:
A list of articles on the topics to be covered is given here.

Course requirements and Grading:
Homework assignments(25%): There will be two simple data assignments (5% each). These will help you get acquainted with the data sources we have in the department and issues relating to downloading the data. There will a replication of a paper of your choice (15%).
Paper discussions (30%): Each student will discuss 5 papers in class. Paper discussion involves presenting to the class the main research question in the paper, the methodology used, the results and conclusion and a critical review of the methods used. The presentation should not last more than 50'.
Final Research project (25%): During week 12, students will make a brief presentation of a topic of their choice –hopefully, the same topic to be used in the Empirical Paper. During this presentation, students should research the main literature and the frontier -i.e., the “state of the finance knowledge”- in the selected field and discuss how they plan to contribute, in a non-trivial way, to the field. The final project will consist of a summary of the literature review, the planned contribution to the field, the tools that can be used, and the data that will be needed. The emphasis will be on the design of a test of your planned contribution. The paper should not exceed 7 pages. Due date: December 3.
Final Exam (20%) : It will cover the Modules in class and also the papers discussed in class.

Some Downloadable Papers: (I'll add more as the semester goes)
  • Module 1: Lecture 1 - Review
  • Modules 1-2: Lecture 2 - EMH and RW
  • Module 3: Lecture 3 - ARCH Models
  • Module 3: R.F. Engle (2001)
  • Module 3: T. Bollerslev, R.F. Engle and D.B. Nelson (1994)
  • Module 3: P.R. Hansen and A. Lunde (2004)
  • Modules 4-6: Lecture 4 - MM
  • Module 4: R. Roll (1984)
  • Module 5: I. Werner (2008)
  • Module 6: J. Hasbrouck (1995)
  • Module 6: I. Figuerola-Ferretti and J. Gonzalo (2008)
  • Modules 7-8: Lecture 5 - Predictability
  • Module 7: J.Y. Campbell and R. Shiller (1988)
  • Module 8: J.Y. Campbell and M. Yogo (2006)
  • Module 9: Lecture 6 - Event Studies
  • Module 9: J. Horowitz (2001)
  • Module 9: C.F.J. Wu (1986)
  • Module 10: Jegadeesh, N. and S. Titman (1993)
  • Modules 12-13: Lecture 7 - Liquidity
  • Module 12: Lesmond, D., M. Schill, and C. Zhou (2004)
  • Module 13: N. Piqueira (2005)
  • Module 13: D. Lesmond, J. Ogden and C. Trzcinka (1999)
  • Modules 14-15: Lecture 8 - CAPM
  • Module 15: E. Fama and K. French (1993)
  • Module 17: Lecture 9 - Conditional CAPM
  • Module 17: R. Jaganathan and Z. Wang (1996)
  • Module 17: J. Lewellen and S. Nagel (2006)
  • Module 18-19: Lecture 10 - Dynamic Asset Pricing Models - I
  • Module 19: L.P. Hansen and R. Jaganathan (1997)
  • Module 20: Lecture 11 - Dynamic Asset Pricing Models - II
  • Module 20: J.Y. Campbell and J. Cochrane (1999)
  • Module 20: T. Cogley and T.J. Sarget (2008)
  • Module 21: Lecture 12 - Capital Structure
  • Module 21: T. Zhao and R. Susmel (2008)
  • Module 2x: Lecture 13 - IPOs

    Note Regarding Papers: You should be able to download all the papers published (through 2002) in the Journal of Finance, Review of Financial Studies, Journal of Business, Journal of Financial and Quantitative Analysis and Journal of Money, Credit and Banking from JSTOR. The library should have a hard copy of all the newer papers.

    Assignments: (I'll add more as the semester goes)
  • Module 1: Update reading list for Modules 21-25, with 2008 FMA papers
  • Module 3: Estimate GARCH(1,1)-GRJ for SP500 series (intra-daily (30'), daily, monthly and annual) -GAUSS program should be used
  • Module 9: Bootstrap the VR(q) statistic. Download Assignment
  • Module 12: Estimate transaction costs. Download Assignment
  • Module 15: Fama and French (1993) exercise.Download Assignment

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