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Content of the Course:
The first part of the lecture explains the fundamental pricing equation and its intuition. We start with the CAPM as the most famous factor model and discuss tests based on time-series and cross-sectional regressions as well as tests based on portfolio sorts. Motivated by the empirical failure of the CAPM, we study the three-factor model of Fama and French and further extensions for e.g. Fama and French five-factor model (Fama and French (2015)). We also discuss the reasons why further risk factors besides the market return are priced. We end the section with some examples of cross sectional ”puzzles” / ”anomalies” e.g. momentum.
Next, we look at the predictability of aggregate stock returns. To explain the predictive power of the price-dividend ratio for future returns, the Campbell-Shiller approximation plays a central role. We also discuss alternative predicting variables like financial ratios or macroeconomic quantities.
In the second part we consider other asset classes besides stocks. This will be primarily an application of the theory and techniques learned in the first part of the course. We will look at currencies, hedge funds and mutual funds. This part of the course will require greater class participation as the lectures will be structured around paper discussions.
Prerequisites:
We expect you to be familiar with the basic concepts of finance from the class ”Introduction to Finance”. In particular, you should know about Markowitz-portfolio selection and the mu-sigma-principle. You should also be familiar with the CAPM and the basic empirical evidence on the CAPM. We also expect you to know expected utility and risk aversion. The course will also require familiarity with basic probability and statistics (in particular: random variables, conditional expectations and probability distributions), regressions. Brief refreshers of all the relevant concepts will be provided in the lectures, however the students are urged to revise all the required background material in their own time. Similarly, due to the rapid pace of the course, the students are strongly encouraged to read the required readings (pencil and paper in hand) before each class.
Learning Outcomes:
Empirical Asset Pricing: To learn about predictability and cross-sectional asset pricing. To learn about testing procedures for factor models, such as regressions and portfolio sorts. To know about other priced factors besides the return on the market portfolio.
Preliminary Syllabus:
- Stylized facts in asset pricing
- Cross-Sectional Asset Pricing
- Asset Pricing Basics
- CAPM: Theory and empirical results (two-pass regression, Fama-MacBeth)
- Intertemporal CAPM
- Portfolio sorts
- Fama-French and beyond, search for factors
- Market Timing: predictive variables, Campbell-Shiller approximation
- Further asset classes
- Currencies: carry trades and currency momentum
- Lustig, H., Roussanov, N. and Verdelhan, A. (2011). Common risk factors in currency markets, Review of Financial Studies 24(11): 3731-3777.
- Menkhoff , L., Sarno, L., Schmeling, M. and Schrimpf, A. (2012a). Carry trades and global foreign exchange volatility, Journal of Finance 67(2): 681{718.
- Menkhoff, L., Sarno, L., Schmeling, M. and Schrimpf, A. (2012b). Currency momentum strategies, Journal of Financial Economics 106(3): 660{684.
- Fixed Income Market: common factors in bond returns
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| Literatur |
There are several textbooks that deal with asset allocation and asset pricing. The course will be primarily based on Cochrane (2009). Students are encouraged to get a copy of the book.
- Cochrane, J. H. (2009). Asset Pricing: (Revised Edition), Princeton University Press.
Additional references, in particular working papers and journal articles, will be given in class. |
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