FIN 395.4 Empirical
Methods in Finance
Syllabus
1. Course Description
This course represents an advanced
study of asset pricing in financial economics. We focus on the empirical
techniques used most often in the analysis of financial markets and how they
are applied to actual market data. The list of topics includes: (a) empirical
tests of Asset Pricing Models b) statistical properties of asset returns, (b)
unconditional tests of asset pricing models (CAPM, APT), (c) conditional tests
of asset pricing models (d) efficient markets hypothesis and anomalies,
(d) behavioral finance, (e) mutual fund and fund flows, (f) international
finance, and (g) miscellaneous topics. The relative emphasis that
each topic receives within category (d-g) will likely depend on the interests
of the students.
2. Class Meetings and
Format
We will meet each Wednesday
and some Monday's 2-5 pm. Each week, I will assign relevant readings. These
readings will consist of statistical background readings at times and specific
papers in empirical financial economics. You are expected to read the material
before the class. The class will not follow a lecture format; rather, I will
act as the discussion leader and background resource, especially as it comes to
techniques or methodology. I will attempt to devise a list of discussion
questions each week to facilitate the presentation of each topic. In addition,
I will assign an empirical exercise applying a concept or technique from class
that requires the use of a statistical package on a common dataset. I would
encourage you to form study groups to discuss the papers, data assignments and
project.
3. Course Resources and
Requirements
The textbooks
for the course is The Econometrics of Financial Markets by John
Campbell, Andrew Lo and Craig MacKinlay (Princeton University Press, 1997).
Chapters of Asset
Pricing by John H. Cochrane are also recommended and Ch. 1-9 is assumed as
background material. I will also assign required readings which are listed in
the outline below. I will strive to make available as many of the supplemental (non-required) readings as possible.
The demands of this course are
likely to be computation-intensive so that some rudimentary programming and
data analysis skills are necessary.
4. Grades
A. Pop Quizes,
data assignments, and class discussion. (35 percent)
B. Research Paper. Research ideas. Students are expected to come up with
research ideas from the readings. More details provided in class. (15 percent)
C. Final Examination.
This exam will take place during the scheduled time in the 11th week of the
quarter and will last 2 hours. It is designed to act as a dry-run test for the
Finance Theory exam. (35 percent)
D. Classroom Presentation.
Students are expected to participate actively in all classroom discussions. However,
each student will act as discussion leader for one of the special topics
sessions (selected in consultation with the instructor) in the 13 and 14th
weeks of the semester. The presentation should comprise a critical review of
the articles selected. (15 percent)
5. Background References
Students should also avail
themselves of the following useful reference books:
6. Course
Outline
Parts of this course are
similar to in nature to that from Andrew Karolyi. He designed the coures by seeking input from professors teaching in the top
doctoral programs in the
The topics covered in the
course are divided into 14 sections, as outlined below. We will cover topic I
to X comprehensively in class. I will encourage the students to choose a topic
from (IX to XV) for their presentations which will take place during the final
week of the quarter.
I. Asset Pricing Theory
(Ch. 1-10 from Cochrane's on-line text).
II. Introduction to
Empirical Asset Pricing
III. The Random Character of Stock Market Prices
(a) Unconditional Distributions
(b) Conditional Distributions
i. Conditional Means - Mean Reversion
ii. Conditional Means - Instrumental Variables
iii. Conditional Variances
iv. Relationship between Means and Variances
(c) Stock Returns and Volume
IV. Capital Asset Pricing
Model
(a) FM Methodology
(b) Unconditional Tests
(c) Conditional Tests - Time Varying Means/Variances
V. The Arbitrage Pricing Theory
(a) Unconditional Tests
(b) Conditional Tests and Extensions
VI. Efficient Markets Hypothesis
(a) Variance Bounds Tests
(b) Anomalies
(c) Price Momentum
(d) Over-reaction and BE/ME
(e) Earnings Momentum
(f) Post-earnings Announcement Drift
VII. Behavioral Finance
(a) Theoretical papers
(b) Empirical papers
i. Bubble Theory
ii. Bubble Empirical
iii. Seasonal Effects
VIII. International Finance
(a) International Asset Pricing
(b) Exchange Rate Exposure
(c) Other International Finance Issues-- Linkages, Correlations, etc.
(d) Capital Flows and Contagion
(c) Other issues
IX. Investors and Mutual
Funds
(a) Institutional Investors
(b) Flows
(c) Performance Evaluation and Mutual funds
(d) Hedge Funds
(e) Short-term behavior and Herding
X. Market Microstructure
(a) Classics
(b) Institutional Aspects of Market Structure
(c) Non-Synchronous Trading and Measurement Biases
(d) Bid-Ask Spreads and Price Discreteness
(e) Price Discovery
(f) Market Design
(g) Microstructure with parts of Finance
(h) Short-sales
XI. Analyst Forecast
XII. Volume/Volatility
XIII. Consumption and
Production Based Asset Pricing Models
(a) Consumption Based
(c) Habit Formation Models
(d) Production Based Models
XIV. Bayesian Studies in
Finance
XV. Event Study Methodology
(a) Traditional Approaches
(b) Long-run Performance Measurement
XVI. Fixed Income
Securities
(a) Term Structure of Interest Rates
(b) Pricing Debt with Default Risk
XVII. Pricing Options, Futures and Other
Derivative Assets
(a) Option Pricing Models
(b) Futures and Forward Prices
(c) Collateralized Debt Obligations (CDOs)
XVIII. Non-Standard
Approaches in Finance
(a) Chaos and Nonlinear Dynamics in Stock Returns
(b) Technical Trading Rules
7. References
The references below are
classified into three categories: (r) denotes a required reading that will be
discussed in class, (s), a supplemental reading, and (m) represents a
background methodological article that students may attempt to read.
(s) Chapter 1
(s) Merton, R. C., 1973,
“An intertemporal capital asset pricing model,” Econometrica
41, 867-887.
(s) Ross, S. A., 1976,
“The arbitrage theory of capital asset pricing,” Journal of Economic
Theory 13, 341-360.
(s) Campbell, John Y., 2000,
"Asset
Pricing at the New Millennium," Journal of Finance 55,
1515-1568.
II. Introduction to Empirical Testing
(s) Silvey,
S. D., 1975, Statistical Inference, Chapter 1.
(r)
Leamer, E., 1983, "Let's Take
the Con Out of Econometrics," American Economic Review 73,
31-43.
(s) McCloskey, 1985, "The
Loss Function has been Mislaid: The Rhetoric of Significance Tests," American
Economic Review 75, 201-205.
(s) Duhem,
(s) Popper, Karl, 1987,
"Science: Conjectures and Refutations," In: Kourany,
J.(ed.), "Scientific Knowledge," 139-155.
(s) Cox, D., 1990, "Role
of Models in Statistical Analysis," Statistical Science 5, 169-74.
(s) De Long, J. Bradford and
Kevin Lang, 1992, "Are All
Economic Hypotheses False?" Journal of Political Economy 100,
1257-1272.
(s) Card, David and Alan B.
Krueger, 1995, "Time-series
minimum-wage studies: A meta-analysis," American Economic
Review 85, 238-244.
(r)
McCloskey, Deirdre N. and Stephen T. Ziliak, 1996, "The
standard error of regressions," Journal of Economic Literature
34, 97-115.
(r)
Campbell, J., A. Lo and C. MacKinlay, 1997, "Chapter 1: Introduction"
in The Econometrics of Financial Markets. Focus on Sections 1.1 to 1.4
(s) Cochrane, John, 2002,
"Stocks
as Money: Convenience Yield and the Tech-Stock Bubble."
III. The Random Character of Stock Market Prices
A. Unconditional Distributions
(s) Cootner,
P., ed., 1964, The Random Character of Stock Market Prices,
(s) Fama, E., 1965, "The
Behavior of Stock Prices," Journal of Business 38, 34-105.
(s) Blattberg,
R. and
(r)
Fama, E., 1976, Foundations
of Finance.
(s) Bachelier,
L., 1900, "Theorie de la Speculation," Annales de l'Ecole Normale Superieure 3, Gauthier-Villars,
(s) Kon,
S., 1984, "Models of Stock Returns: A Comparison," Journal of
Finance 39, 148-165.
(s) Harris, L., 1986, "A
Transactions Data Study of Weekly and Intradaily
Patterns in Stock Returns," Journal of Financial Economics 16,
99-117.
B.1 Conditional Means - Mean
Reversion
(m) Dickey, D. and W. Fuller,
1981, "Likelihood Ratio Statistics for Autoregressive Time Series with a
Unit Root" Econometrica 49, 1057-1072.
(s) Conrad, J. and G. Kaul, 1988, "Time Variation in Expected Returns,"
Journal of Business, 409-426.
(s) Fama, E. and K. French,
1988, "Permanent and Temporary Components of Stock Prices," Journal
of Political Economy 96, 246-273.
(s) Lo, A. and C. MacKinlay,
1988, "Stock Market Prices Do Not Follow Random Walks: Evidence from a
Simple Specification Test," Review of Financial Studies 1, 41-66.
(s) Poterba, J. and L.
Summers, 1988, "Mean Reversion in Stock Returns: Evidence and
Implications," Journal of Financial Economics 22, 27-60.
(m) Lo, A. and C. MacKinlay,
1989, "The Size and Power of the Variance Ratio Test in Finite Samples: A
(m) Schwert, G., 1989,
"Tests for Unit Roots: A
(s) Jegadeesh, Narasimhan,
1990, "Evidence
of Predictable Behavior of Security Returns," Journal of Finance
45, 881-898.
(s)
(s) Kim, M., C. Nelson, and R.
Startz, 1991, "Mean Reversion in Stock Prices:
Evidence and Implications," Review of Economic Studies 58, 515-528.
(s) Lo, A., 1991,
"Long-Term Memory in Stock Market Prices," Econometrica 59,
1279-1313.
(r)
Mech, Timothy S., 1993, "Portfolio return
autocorrelation," Journal of Financial Economics 34, 307-338.
(r)
Campbell, J., A. Lo and C. MacKinlay, 1993, "Chapter 2: Predictability of
Asset Returns" in The Econometrics of Financial Markets.
(s) Boudoukh,
J., M. Richardson and R. Whitelaw, 1994, "A Tale of Three
Schools: Insights on Autocorrelations of Short-Horizon Stock Returns,"
Review of Financial Studies 7, 539-573.
(m) Hamilton, J., 1994, Time
Series Analysis, Chapter 1-2.
(m) Hamilton, J., 1994, Time
Series Analysis, Chapter 17.
(s) Jegadeesh, Narasimhan and
(s) Kandel, S. and R.
Stambaugh, 1996, "On the Predictability of Stock Returns: An Asset
Allocation Perspective," Journal of Finance 51, 385-424.
(s) Chordia, Tarun and Bhaskaran Swaminathan, 2000, "Trading
Volume and Cross-Autocorrelations in Stock Returns," Journal of
Finance 55, 913-935.
B.2
Conditional Means - Instrumental Variables
(s) Fama, E. and
(s) Fama, E. and M. Gibbons,
1982, "Inflation, Real Returns and Capital Investment," Journal of
Monetary Economics 9, 297-323.
(s) Keim, D. and R. Stambaugh,
1986, "Predicting Returns in the Stock and Bond Markets," Journal
of Financial Economics 17, 357-390.
(s) Fama, E. and K. French,
1988, "Dividend Yields and Expected Stock Returns," Journal of
Financial Economics 22, 3-26.
(r)
Fama, E. and K. French, 1989, "Business Conditions and Expected Returns on
Stocks and Bonds," Journal of Financial Economics 25, 23-50.
(r)
Bossaerts, P., and P. Hillion,
1999, "Implementing Statistical Criteria to Select Return Forecasting
Models: What Do We Learn?" Review of Financial Studies 12, 405-428.
(s) Cremers, Martijn, 2002, “Stock
Return Predictability: A Bayesian Model Selection Perspective,” Review
of Financial Studies, Vol. 15, No. 4, 1223-1249.
(s) Goyal, Amit and Ivo Welch, 2003, "Predicting
the Equity Premium with Dividend Ratios," Management Science 49,
639-654.
(r) Henkel, Sam, Martin J. Spencer, and Federico Nardari, 2006, “Vanishing
Return Predictability and the Business Cycle,” Unpublished Working
Paper,
(s)
(s) Cochrane, John H., 2008, “The
Dog that Did not Bark: A Defense of Return
Predictability”, Review of Financial Studies 21, 1533-1575.
(s) Welch, Ivo, and Amit Goyal, 2008, “A
Comprehensive Look at the Empirical Performance of Equity Premium
Prediction”, Review Financial Studies 21, 1455-1508.
(r) Boudoukh, Jacob, Matthew Richardson, and Robert F.
Whitelaw, 2008, “The
Myth of Long-Horizon Predictability”, Review Financial Studies
21, 1577-1605.
B.3 Conditional Variances
(s) Christie, A., 1982,
"The Stochastic Behavior of Common Stock Variances: Value, Leverage and
Interest Rate Effects," Journal of Financial Economics 10, 407-432.
(m) Engle, R., 1982,
"Autoregressive Conditional Heteroskedasticity with Estimates of the
Variance of
(s) Bollerslev, T., 1986,
"A Conditionally Heteroskedastic Time Series Model for Speculative Prices
and Rates of Return," Review of Economics and Statistics 69,
542-547.
(s) French, K. and R. Roll,
1986, "Stock Return Variances: The Arrival of Information and the Reaction
of Traders," Journal of Financial Economics 17, 5-26.
(m) Bollerslev, T., 1986,
"Generalized Autoregressive Conditional Heteroscedasticity," Journal
of Econometrics 31, 307-327.
(s) Akgiray,
V., 1989, "Conditional Heteroscedasticity in Time Series of Stock Returns,"
Journal of Business 62, 55-80.
(m) Bollerslev, T., Chou, R.
and K.Kroner, 1990, "ARCH Modeling in Finance: A
Review of the Theory and Empirical Evidence," Journal of Econometrics
52, 5-59.
(s) Pagan, A. and G. Schwert,
1990, "Alternative Models for Conditional Stock Volatility," Journal
of Econometrics 45, 267-290.
(s) Schwert, G., 1990,
"Why Does Stock Market Volatility Change Over Time," Journal of
Finance 44, 1115-1153.
(s) Campbell, J., A. Lo and C.
MacKinlay, 1993, "Chapter 12: Nonlinearities in Financial Data" in The
Econometrics of Financial Markets. Sections 12.1 and 12.2 only.
(m) Hamilton, J., 1994, Time
Series Analysis, Chapter 21.
(s) Pagan, A. "The
Econometrics of Financial Markets" Journal of Empirical Finance 3,
15-102.
B.4 Relationship between
Conditional Means and Variances
(s) Merton, R., 1980, "On
Estimating the Expected Return on the Market," Journal of Financial
Economics 8, 323-362.
(s) French, K., Schwert, W.
and R. Stambaugh, 1987, "Expected Stock Returns and Volatility," Journal
of Financial Economics 19, 3-30.
(m) Chou, R., 1988,
"Volatility Persistence and Stock Valuations," Journal of Applied
Econometrics 3, 279-294.
(m) Pagan, A. and A. Ullah, 1988, "The Econometric Analysis of Models with
Risk Terms," Journal of Applied Econometrics 3, 87-105.
(s) Hamao Y., R. Masulis and
V. Ng, 1990, "Correlations in Price Changes and Volatility Across
International Stock Markets," Review of Financial Studies 3,
281-307.
(s) Nelson, D., 1991,
"Conditional Heteroscedasticty in Asset Returns:A New Approach," Econometrica 59,
347-370.
C. Stock Returns and Volume
(s) Westerfield,
R., 1977, "The Distribution of Common Stock Price Changes: An Application
of Transactions Time and Subordinated Stochastic Models," Journal of
Financial and Quantitative Analysis 12, 743-765.
(s) Tauchen,
G. and M. Pitts, 1983, "The Price Variability-Volume Relationship on
Speculative Markets," Econometrica 51, 485-505.
(s) Harris, L., 1987,
"Transactions Data Tests of the Mixture of Distributions Hypothesis,"
Journal of Financial and Quantitative Analysis 22, 127-141.
(s) Karpoff,
J., 1987, "The Relation between Price Changes and Trading Volume: A
Survey," Journal of Financial and Quantitative Analysis 22,
109-126.
(s) Lamoureux,
C. and
(s) Gallant, R., Rossi, P. and
G. Tauchen, 1992, "Stock Prices and
Volume," Review of Financial Studies 5, 199-242.
(s) Campbell, J., Grossman, S.
and J. Wang, 1993, "Trading Volume and Serial Correlation," Quarterly
Journal of Economics 108, 905-939.
(s) Jones, C., G. Kaul and M. Lipson, 1994 "Transactions,
Volume and Volatility," Review of Financial Studies 7, 631-651.
(s) Andersen, T., 1996,
"Return Volatility and Trading Volume: An Information Flow Interpretation
of Stochastic Volatility," Journal of Finance 51, 169-203.
(s) Chan, Kalok,
and Fong, Wai-Ming, 2000, "Trade size, order
imbalance, and the volatility-volume relation," Journal of Financial
Economics 57, 247-273.
(s) Chordia, Tarun, Richard Roll, and
Avanidhar Subrahmanyam, 2001, “Market
Liquidity and Trading Activity,” Journal of Finance 56,
501-530.
(s) Gervais,
Simon, Ron Kaniel and Dan H. Mingelgrin, 2001, "The
High-Volume Return Premium" The Journal of Finance 56, 877-919.
(s)
(s)
Chordia, Tarun, Sahn-Wook Huh, and Avanidhar
Subrahmanyam, 2007, “The
Cross-Section of Expected Trading Activity”, Review of Financial
Studies 20, 709-740.
IV.
The Capital Asset Pricing Model
(r)
Campbell, J., A. Lo and C. MacKinlay, 1993, "Chapter 5: The Capital Asset
Pricing Model" in The Econometrics of Financial Markets.
(r)
Cochrane (Ch 12)
(s) Petersen, Mitchell
A., 2009, “Estimating
Standard Errors in Finance Panel Data Sets: Comparing Approaches”, Review
of Financial Studies 22, 435-480.
(r)
Black, F., Jensen, M. and M. Scholes, 1972, "The Capital Asset Pricing
Model: Some Empirical Tests," in M. Jensen ed., Studies in the Theory
of Capital Markets.
(r)
Fama, E. and J. MacBeth, 1973, "Risk, Return, and Equilibrium: Empirical
Tests," Journal of Political Economy 91, 607-636.
(s) Fama, E., 1976, Foundations of
Finance.
(s) Roll, R., 1977, "A
Critique of the Asset Pricing Theory's Tests Part 1: On Past and Potential Testability
of the Theory," Journal of Financial Economics 4, 129-176.
(m) Buse,
A., 1982, "The Likelihood Ratio, Wald and Lagrange Multiplier Tests: An
Expository Note," American Statistician 36, 153-157.
(s) Gibbons, M., 1982,
"Multivariate Tests of Financial Models: A New Approach," Journal
of Financial Economics 10, 3-27.
(m) Anderson, T., 1984, An
Introduction to Multivariate Statistical Analysis,
(s) Kandel, S., 1985,
"The Likelihood Ratio Test Statistic of Mean-Variance Efficiency of a
Given Portfolio," Journal of Financial Economics 13, 575-592.
(s) Shanken, J., 1985,
"Multivariate Tests of the Zero-Beta CAPM," Journal of Financial
Economics 14, 327-348.
(s) MacKinlay, C., 1987,
"On Multivariate Tests of the CAPM," Journal of Financial
Economics 18, 341-371.
(s) Huberman, G. and S.
Kandel, 1988, "Mean-Variance Spanning," Journal of Finance 43,
873-888.
(s) Gibbons, M., Ross, S. and
J. Shanken, 1989, "A Test of the Efficiency of a Given Portfolio," Econometrica
57, 1121-1152.
(s) Lo, A. and C. MacKinlay,
1990, "Data Snooping Biases in Tests of Financial Asset Pricing
Models," Review of Financial Studies 3, 431-468.
(r)
Fama, E. and K. French, 1992, "The Cross-Section of Expected Stock
Returns," Journal of Finance 47, 427-465.
(s)
(s) Kothari, S., J. Shanken
and R. Sloan, 1995 "Another
Look at the Cross-section of Expected Stock Returns," Journal of
Finance 50, 185-224.
C.
Conditional Tests with Time Varying Means and Variances
(m) Hansen, L. and K.
Singleton, 1982, "Generalized Instrumental Variables Estimation of
Nonlinear Rational Expectations Models," Econometrica 50,
1269-1286. (Errata in Volume 52, 267-268.)
(s) Hansen, L., 1982,
"Large Sample Properties of Generalized Method of Moments
Estimators," Econometrica 50, 1029-1054.
(s) Gibbons, M. and W. Ferson,
1985, "Testing Asset Pricing Models with Changing Expectations and an
Unobservable Market Portfolio," Journal of Financial Economics 14,
217-236.
(s) Ferson, W., S. Kandel and
R. Stambaugh, 1987, "Tests of Asset Pricing with Time-Varying Expected
Risk Premiums and Market Betas," Journal of Finance 42, 201-220.
(s) Bollerslev, T., R. Engle
and J. Wooldridge, 1988, "A Capital Asset Pricing Model with Time Varying
Covariances," Journal of Political Economy 96, 116-131.
(r) Harvey, C., 1989, "Time Varying Conditional
Covariances in Tests of Asset Pricing Models," Journal of Financial
Economics 24, 289-317.
(s)
(s) Chan, K.C., G.A. Karolyi
and R. Stulz, 1992, "Global Financial Markets and the Risk Premium on
(s) Campbell, J., A. Lo and C.
MacKinlay, 1993, "Appendix A.2 and A.4: Generalized Method of Moments and
Maximum Likelihood" in The Econometrics of Financial Markets. )
Campbell, J., A. Lo and C. MacKinlay, 1993, "Appendix A.2 and A.4:
Generalized Method of Moments and Maximum Likelihood" in The
Econometrics of Financial Markets.
(m) Duffie,
D. and K. Singleton, 1993, "Simulated Moments Estimation of Markov Models
of Asset Prices," Econometrica 61, 929-952.
(s) Ferson, W., S. Foerster, and D. Keim, 1993, "General Tests of Latent
Variable Models and Mean-Variance Spanning," Journal of Finance 48,
131-155.
(s) Ogaki, Masao, 1993,
Generalized Method of Moments: Econometric Applications, Handbook of
Statistics, Vol 11.
(m) Hamilton, J., 1994, Time
Series Analysis, Chapter 14.
(s) Jagannathan, R. and Z.
Wang, 1996, "The
Conditional CAPM and the Cross-Section of Expected Returns," Journal
of Finance 51, 3-54.
(r)
Lewellen, Jonathan and Stefan Nagel, 2006, “The
Conditional CAPM Does Not Explain Asset-Pricing Anomalies,”
Forthcoming in the Journal of Financial Economics
(r)
Cochrane, GMM sections (Ch. 10, Ch. 11 Optional).
V. The Arbitrage Pricing Theory
(r)
Campbell, J., A. Lo and C. MacKinlay, 1993, "Chapter 6: Multifactor
Pricing Models" in The Econometrics of Financial Markets.
(s) Ferson, W., 1994,
"Theory and Empirical Testing of Asset Pricing Models," in The
Finance Handbook, Jarrow, R., W. Ziemba and V. Maksimovic, (eds),
North-Holland Publishers.
A. Unconditional
Tests
(s) Roll, R. and S. Ross,
1980, "An Empirical Investigation of the Arbitrage Pricing Theory," Journal
of Finance 35, 1073-1103.
(s) Shanken, J., 1982,
"The Arbitrage Pricing Theory: Is It Testable?" Journal of Finance
37, 1129-1140.
(s) Chen, N., 1983, "Some
Empirical Tests of Arbitrage Pricing," Journal of Finance 38,
1393-1414.
(s) Dhrymes,
P., Friend,
(m) Anderson, T., 1984, An
Introduction to Multivariate Statistical Analysis,
(s) Roll, R. and S. Ross,
1984, "A Critical Reexamination of the Empirical Evidence on the Arbitrage
Pricing Theory: A Reply," Journal of Finance 39, 347-350.
(s) Chan, K.C., N. Chen
and D. Hsieh, 1985, "An Exploratory Investigation of the Firm Size
Effect," Journal of Financial Economics 14, 451-471.
(s) Dybvig,
P. and S. Ross, 1985, "Yes, the APT is Testable," Journal of
Finance 40, 1173-1188.
(s) Shanken, J., 1985,
"Multi-Beta CAPM or Equilibrium APT?: A Reply," Journal of Finance
40, 1189-1196.
(r)
Chen, N., Roll, R. and S. Ross, 1986, "Economic Forces and the Stock
Market: Testing the APT and Alternative Asset Pricing Theories," Journal
of Business 59, 383-403.
(s) Trzcinka,
C., 1986, "On the Number of Factors in the Arbitrage Pricing Model," Journal
of Finance 41, 347-368.
(s) Huberman, G., S. Kandel
and R. Stambaugh, 1987, "Mimicking Portfolios and Exact Arbitrage
Pricing," Journal of Finance 42, 1-10.
(s) Lehmann,
B. and D. Modest, 1988, "The Empirical Foundations of the Arbitrage
Pricing Theory," Journal of Financial Economics 21, 213-254.
(s) Connor, G. and R.
Korajczyk, 1988, "Risk and Return in an Equilibrium APT: Application of a
New Test Methodology," Journal of Financial Economics 21, 255-289.
(s) Shukla,
R. and C. Trzcinka, 1990, "Sequential Tests of
the Arbitrage Pricing Theory: A Comparison of Principal Components and Maximum
Likelihood Factors," Journal of Finance 45, 1541-1564.
(r)
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.
(s) Daniel, K., and S.
Titman, 2006, “Testing
factor-model explanations of market anomalies”, Working Paper,
B. Conditional Tests and Extensions
(s) Ferson, W. and C. Harvey,
1991, "The Variation of Economic Risk Premiums," Journal of
Political Economy 99, 385-415.
(s) Bansal, R. and S. Viswanathan, 1993, "No Arbitrage and Arbitrage
Pricing: A New Approach," Journal of Finance 48, 1231-1261.
(s) Bansal, R., D. Hsieh, and
S. Viswanathan, 1993, "A New Approach to
International Arbitrage Pricing," Journal of Finance 48,
1719-1747..
(s) Connor, G. and R.
Korajczyk, 1995, "The Arbitrage Pricing Theory and Multifactor Models of
Asset Returns," Finance, Handbooks in Operations Research and
Management Science Volume 9, Ch. 4.
(s) Chan, L., J. Karceski and
J. Lakonshok, 1998, "The Risk and Return from
Factors" Journal of Financial and Quantitative Analysis 33,
159-187.
(s) Ghysels,
E., 1998, "On Stable Factor Structures in the Pricing of Risk: Do
Time-Varying Betas Help or Hurt?" Journal of Finance 53, 549-573.
(s) Jagannathan, R. and Z.
Wang, 1998, "An Asymptotic Theory for Estimating Beta-Pricing Models Using
Cross-sectional Regression," Journal of Finance 53, 1285-1309.
(s) Ferson, Wayne E. and
(s) Wang, Kevin Q., 2003, “Asset
Pricing with Conditioning Information: A New Test,” Journal
of Finance 58, 161-196.
(s) Campbell, John Y. and Tuomo
Vuolteenaho, 2004, “Inflation
Illusion and Stock Prices,” The American Economic Review 94,
19-23.
VI. The Efficient Markets Hypothesis
(s) Fama, E., 1970,
"Efficient Capital Markets: A Review of Theory and Empirical Work," Journal
of Finance 25, 383-417.
(s) Fama, E., 1976, Foundations of
Finance.
(s) Grossman, S. and J.
Stiglitz, 1980, "On the Impossibility of Informationally Efficient
Markets," American Economic Review 70, 393-408.
(s) Grossman, S., 1989, The
Informational Role of Prices.
(s) Fama, E., 1991,
"Efficient Capital Markets: II," Journal of Finance 46,
1575-1617.
A. Variance Bounds Tests
(r)
Campbell, J., A. Lo and C. MacKinlay, 1993, "Chapter 7: Present Value
Relations" in The Econometrics of Financial Markets.
(s) Ackert,
L. and B. Smith, 1993, "Stock Price Volatility, Ordinary Dividends, and
Other Cash Flows to Shareholders," Journal of Finance 48,
1147-1159.
(s) Bollerslev, T. and R. Hodrick, 1992, "Financial Market Efficiency
Tests," in The Handbook of Applied Econometrics, I, Macroeconomics,
M. Pesaran and R. Wickins (eds),
North-Holland Publishers.
(s) Campbell, J. and R.
Shiller, 1987, "Co-integration and Tests of Present Value Models," Journal
of Political Economy 95, 1062-1088.
(s) Flavin,
M., 1983, "Excess Volatility in the Financial Markets: A Reassessment of
the Empirical Evidence," Journal of Political Economy 91, 929-956.
(s) Kleidon,
A., 1986, "Variance Bounds Tests and Stock Price Valuation Models," Journal
of Political Economy 94, 953-1001.
(s) Kothari, S. and J.
Shanken, 1992, "Stock Return Variation and Expected Dividends: A
Time-Series and Cross-Sectional Analysis," Journal of Financial
Economics 31, 177-210.
(s) Lee, Bong-Soo, 1998, "Permanent, Temporary and Non-Fundamental
Components of Stock Prices" Journal of Financial and Quantitative
Analysis 33, 1-32.
(s) LeRoy,
S., 1989, "Efficient Capital Markets and Martingales," Journal of
Economic Literature 27, 1583-1621.
(s) LeRoy,
S. and R. Porter, 1981, "The Present Value Relation: Tests Based on
Variance Bounds," Econometrica 49, 555-574.
(s) Marsh, T. and R. Merton,
1986, "Dividend Variability and Variance Bounds Tests for the Rationality
of Stock Market Prices," American Economic Review 76, 483-498.
(s) Shiller, R., 1981,
"Do Stock Prices Move Too Much To Be Justified By Subsequent Changes in
Dividends?" American Economic Review 71, 421-436.
(s) West, K., 1988,
"Dividend Innovations and Stock Price Volatility," Econometrica
56, 37-61.
(m) Engle, R. and C. Granger,
1987, "Co-Integration & Error Correction: Representation, Estimation
and Testing," Econometrica 55, 251-276.
(m) Hamilton, J., 1994, Time
Series Analysis, Chapter 17.
(m) Johansen, S., 1988,
"Statistical Analysis of Cointegrating Vectors," Journal of
Economics, Dynamics and Control 12, 231-254.
(m) Johansen, S., 1991,
"Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian
Vector Autoregressive Models," Econometrica 59, 1551-1581.
B. Anomalies
(s) Banz, R., 1981, "The
Relationship Between Return and Market Value of Common Stock," Journal
of Financial Economics 9, 3-18.
(s) Reinganum,
M., 1981, "Misspecification of Capital Asset Pricing: Empirical Anomalies
Based on Earnings Yields and Market Values," Journal of Financial
Economics 9, 19-46.
(s) Keim, D., 1983,
"Size-Related Anomalies and Stock Return Seasonality: Further Empirical
Evidence," Journal of Financial Economics 12, 13-32.
(s) Rosenberg, B., Reid, K.
and R. Lanstein, 1985, "Persuasive Evidence of
Market Inefficiency," Journal of Portfolio Management 12, 9-16.
(s) Lakonishok, J. and S. Smidt, 1988, "Are Seasonal Anomalies Real? A Ninety-Year
Perspective," Review of Financial Studies 1, 403-427.
(s) Jegadeesh, N., 1990,
“Evidence of predictable behavior of security returns,” Journal
of Finance 45, 881-898.
(s) Lehmann,
B., 1990, "Fads, Martingales, and Market Efficiency," Quarterly
Journal of Economics 105, 1-28.
(s) Zarowin,
P., 1990, "Size, Seasonality and Stock Market Overreaction," Journal
of Financial and Quantitative Analysis 25, 113-125.
(s) Lo, A. and C. MacKinlay,
1990, "When Are Contrarian Profits Due to Stock Market Overreaction?"
Review of Financial Studies 3, 175-207.
(s) Chopra, N., Lakonishok, J.
and J. Ritter, 1992, "Measuring Abnormal Performance: Do Stocks
Overreact?" Journal of Financial Economics 31, 235-268.
(r)
Jegadeesh, N. and S. Titman, 1993, "Returns to Buying Winners and Selling
Losers: Implications for Stock Market Efficiency," Journal of Finance
48, 65-91.
(s) Badrinath,
S., J. Kale, and T. Noe, 1995, "Of Shepherds,
Sheep and the Cross-autocorrelation in Equity Returns" Review of
Financial Studies 8, 401-430.
(s) Chan, L., N. Jegadeesh,
and J. Lakonishok, 1996, "Momentum Strategies" Journal of Finance
51, 1681-1713.
(s) Loughran, T., and J. R.
Ritter, 1996, “Long-term market overreaction: The effect of low-priced
stocks,” Journal of Finance 51, 1959-1970.
(s) Liew,
Jimmy and Maria Vassalou, 1999, "Can
book-to-market, size and momentum be risk factors that predict economic growth?"
Journal of Financial Economics 57, 221-245.
(s) Grundy, Bruce D. and J.
Spencer Martin, 2001, "Understanding
the Nature of the Risks and the Source of the Rewards to Momentum Investing,"
Review of Financial Studies 14, 29-78.
(r)
Jegadeesh, N. and S. Titman, 2001, "Profitability
of Momentum Strategies: An Evaluation of Alternative Explanations." Journal
of Finance 56, 699-720.
(s) Korajczyk, Robert A. and Ronnie
Sadka, 2004, “Are
Momentum Profits Robust to Trading Costs?” Journal of Finance
59, 1039-1082.
(r)
Chordia, Tarun and Lakshmanan Shivakumar, 2002, “Momentum,
Business Cycle, and Time-Varying Expected Returns,” Journal of
Finance 57, 985-1019.
(r)
(s) Grinblatt, Mark and Tobias J. Moskowitz, 2004, “Predicting
stock price movements from past returns: the role of consistency and tax-loss
selling,” Journal of Financial Economics 71, 541-579.
(r)
Grinblatt, Mark and Bing Han, 2005, “Prospect
theory, mental accounting, and momentum,” Journal of Financial
Economics 78, 311-339.
(s) Hong, H., T. Lim,
and J. C. Stein, 2000, “Bad
News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum
Strategies,” Journal of Finance 55, 265-295.
D. Earnings Momentum
(s) Chan, Louis K.C.,
Narasimhan Jegadeesh, and Josef Lakonishok, 1996, "Momentum
Strategies," Journal of Finance 51, 1681-1713.
(s)
(s) Graham, B., and D. Dodd,
1934, Security Analysis,
(s) DeBondt,
W. and R. Thaler, 1985, "Does the Stock Market Overreact?" Journal
of Finance 40, 793-805.
(s) DeBondt,
W. and R. Thaler, 1987, "Further Evidence of Investor Overreaction and
Stock Market Seasonality," Journal of Finance 42, 557-581.
(s) Chan, K.C., 1988, "On
the Contrarian Investment Strategy," Journal of Business 61,
147-163.
(s) Ball, R. and S. Kothari,
1989, "Nonstationary Expected Returns: Implications for Tests of Market
Efficiency and Serial Correlation in Returns," Journal of Financial
Economics 25, 51-74.
(s) Davis, J., 1994,
“The cross-section of realized stock returns: The pre-Compustat
evidence,” Journal of Finance 49, 1579-1593.
(r)
Lakonishok, J., A. Shleifer and R. Vishny, 1994, "Contrarian Investment,
Extrapolation and Risk," Journal of Finance 49, 1541-1578.
(s) Berk, J. B., 1995,
“A critique of size related anomalies,” Review of Financial Studies
8, 275-286.
(s) Chan, L. K. C., N.
Jegadeesh, and J. Lakonishok, 1995, “Evaluating the performance of value
versus glamour stocks: The impact of selection bias,” Journal of
Financial Economics 38, 269-296.
(r)
Fama, E. F., and K. R. French, 1995, “Size and book-to-market factors in
earnings and returns,” Journal of Finance 50, 131-155.
(s) Haugen, R., 1995,
“The new finance: The case against efficient markets,” (Prentice
Hall, Englewood Cliffs,
(s) Kothari, S. P., J.
Shanken, and R. G. Sloan, 1995, “Another look at the cross-section of
expected stock returns,” Journal of Finance 50, 185-224.
(s) Fama, E. and K. French,
1996, "Multifactor Explanations of Asset Pricing Anomalies," Journal
of Finance 51, 55-83.
(s) La Porta,
R., 1996, “Expectations and the cross-section of stock returns,” Journal
of Finance 51, 1715-1742.
(r)
Daniel, K., and S. Titman, 1997, “Evidence on the characteristics of
cross-sectional variation in stock returns,” Journal of Finance
52, 1-33.
(s) La Porta,
R., J. Lakonishok, A. Shleifer, and R. Vishny, 1997, “Good news for value
stocks: further evidence on market efficiency,” Journal of Finance
52, 859-874.
(s) Loughran, T., 1997,
“Book-to-market across firm size, exchange, and seasonality: Is there an
effect?” Journal of Financial and Quantitative Analysis 32,
249-268.
(s) Berk, Jonathan B., 1998, “Sorting
out sorts,” Journal of Finance 55, 407-427.
(s) Davis, J., E. F. Fama, and
K. R. French, 2000, “Characteristics, covariances, and average returns:
1929-1997,” Journal of Finance 55, 389.
(r)
(r)
(r)
Lewellen, Jonathan, Stefan Nagel and Jay Shanken, 2006, “A
Skeptical Appraisal of Asset-Pricing Tests,” Unpublished Working
Paper,
F.
Post-earnings Announcement Drift
(r) Ball, Ray, and Philip
Brown, 1968, "An
empirical evaluation of accounting income numbers," Journal of
Accounting Research Autumn, 1-48.
(r)
Bernard, Victor and Jacob K. Thomas, 1989, "Post-earnings-announcement
drift: delayed price response or risk premium?" Journal of
Accounting Research 27, 1-36.
(s) Abarbanell,
Jeffery S. and Victor L. Bernard, 1992, "Tests of
Analysts' Overreaction/Underreaction to Earnings Information as an Explanation
for Anomalous Stock Price Behavior," Journal of Finance 47,
1181-1207.
(s)
A) Mostly Theoretical
(s) Shiller, Robert J., 2003, “From
Efficient Markets Theory to Behavioral Finance,” Journal of
Economic Perspectives, 17, 83-104.
(s) Shleifer, Andrei, 2000, Inefficient Markets
- An Introduction to Behavioral Finance,
(s) Black, Fisher, 1986, Noise,
Journal of Finance 41, 529-543.
(s) DeLong, J. Bradford,
Andrei Shleifer, Lawrence H. Summers, and Robert Waldmann,
(s) DeLong, J. Bradford,
Andrei Shleifer, Lawrence H. Summers, and Robert Waldmann, 1990b,
"Positive feedback investment strategies and destabilizing rational
speculation," Journal of Finance 45, 379-395.
(s) Scharfstein, David S., and
Jeremy C. Stein, 1990, "Herd behavior and investment," American
Economic Review 80, 465-479.
(s) Froot, Kenneth A.,
David S. Scharfstein, and Jeremy C. Stein, 1992, "Herd on the street:
informational inefficiencies in a market with short-term speculation," Journal
of Finance 47, 1461-1484.
(s) Benartzi, S. and R. H.
Thaler, 1995, “Myopic loss aversion and the equity premium puzzle,”
Quarterly Journal of Economics 110, 73-92.
(s) Barberis, N., A. Shleifer,
and R. Vishny, 1998, “A model of investor sentiment,” Journal of
Financial Economics 49, 307-343.
(s) Barberis, N. and Richard
Thaler, 2003, "A
Survey of Behavioral Finance", in the Handbook of the
Economics of Finance.
(r) Hong, Harrison,
and Jeremy C. Stein, 1999, "A
Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset
Markets", Journal of Finance 54, 2143-2184.
(r) Daniel, K., D. Hirshleirfer, and A. Subrahmanyam, 1998, “Investor
Psychology and Security Market Under- and Overreactions,” Journal
of Finance 53, 1839-1885.
(s) Barberis, Nicholas, and Andrei Shleifer, 2003,
“Style
Investing,” Journal of Financial Economics, 68,
161-199.
(s) Hirshleifer, David, 2001, Investor
Psychology and Asset Pricing, Journal of Finance 56, 1533-1597.
(r)
Shleifer, Andrei, and Robert W. Vishny, 1997, “The
Limits of Arbitrage,” Journal of Finance, 52, 35 -55.
(s) Grinblatt, M., and M. Keloharju, 2006, “Sensation
seeking, overconfidence, and trading activity”, Working Paper, UCLA.
B) Empirical
(s) Shleifer, Andrei, 1986, Do
Demand Curves for Stocks Slope Down? The Journal of Finance 41,
579-590.
(r) Barberis,
Nicholas, Andrei Shleifer, and Jeffery Wurgler, 2005, Comovement,
Journal of Financial Economics.
(s) Odean, Terrance, 1998, Are investors reluctant
to realize their losses?, Journal of Finance 53, 1775-1798.
(r) Odean,
Terrance, 1999, "Do
Investors Trade Too Much?", American
Economic Review 89, 1279-1298.
(s) Barber, Brad M., and Terrance
Odean, 2000, Trading is hazardous to your wealth: The common stock investment
performance of individual investors, Journal of Finance 55, 773-806.
(s) Hong,
(s) Hong, Harrison and Jeremy
Stein, 2003, "Differences
of Opinion, Short-Sales Constraints and Market Crashes," Review of
Financial Studies 16,487-525.
(s) Wurgler, Jeffrey and
Malcolm Baker, 2003, "Investor
sentiment and the cross-section of stock returns," Journal of
Finance 61, 1645-1680.
(s) Hong, Harrison, Jeffrey Kubik, and Jeremy Stein, 2004 "Social Interaction
and Stock Market Participation," Journal of Finance 59,
137-163.
(s) Frazzini, Andrea,
2006, "The Disposition Effect and Under-Reaction to News," Journal
of Finance 61, 2017-2046.
(s) Odean, Terrance, Brad
Barber and Ning Zhu, Systematic
Noise, Berkley Working paper.
(s) Odean, Terrance, Brad
Barber and Ning Zhu,
Do Noise Traders Move Markets?, Berkley Working paper.
(s) Barber, Brad M., and Terrance Odean,
2008, “All
that glitters: The effect of attention and news on the buying behavior of
individual and institutional investors”, Review Financial Studies
21, 785-818.
(s) Barber, Brad M.,
and Terrance Odean, 2008, “All that glitters: The effect of attention and
news on the buying behavior of individual and institutional investors”, Review
of Financial Studies 21, 785.
(r) Kumar, Alok,
2009, Who Gambles in the Stock Market?, Forthcoming, Journal of Finance.
(s) Kumar, Alok, 2008, Dynamic Style
Preferences of Individual Investors and Stock Returns, Forthcoming, Journal of Financial and Quantitative
Analysis.
(r) Ron
Kaniel, Gideon Saar Sheridan Titman, 2008, “Individual
investor trading and stock returns”, The Journal of Finance
63, 273-310.
B.1. Bubble Theory
(s) Friedman,
(s) Fama, Eugene F., 1965, “The
Behavior of Stock-Market Prices,” Journal of Business, 38,
34-105.
(s)Garber, Peter M., 1989, “Tulipmania,”
Journal of Political Economy, 97, 535-560.
(s) DeLong, J. Bradford,
Andrei Shleifer,
(s) DeLong, J. Bradford,
Andrei Shleifer,
(s)
(s) Shiller, Robert J.,
(s) Brunnermeier, Marcus K., 2001, “Asset
Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis and
Herding,”
(s) Abreu, Dilip, and Marcus K. Brunnermeier, 2002, “Synchronization Risk and
Delayed Arbitrage,” Journal of Financial Economics, 66, 341-360.
(s) Abreu, Dilip, and Marcus K. Brunnermeier, 2003, “Bubbles
and Crashes,” Econometrica, 71, 173-204.
(s) De Bondt, Werner, 2003, “Bubble Psychology,"
in W.C. Hunter, G.G. Kaufman and M. Pomerleano
(eds.), Asset Price Bubbles, MIT Press, Cambridge, MA.
(s) LeRoy, Stephen,
2004, “Rational
Exuberance,” Journal of Economic Literature, 42, 783-804.
(s) Hong, Harrison G., Jose A. Scheinkman,
and Wei Xiong, 2005, “Asset
Float and Speculative Bubbles”, Working Paper,
B.2. Bubble Empirical
(s) Ofek, Eli, and Matthew Richardson, 2002, “The
Valuation and Market Rationality of Internet Stock Prices,”
(s) Ofek, Eli, and Matthew Richardson, 2003, “DotCom
Mania: The Rise and Fall of Internet Stock
Prices,” Journal of Finance, 58, 1113-1137.
(s) Brunnermeier, M. K.,
and
(s) Pastor, Lubos, and Pietro
Veronesi, 2005, “Was
There a NASDAQ Bubble in the Late 1990s?” working paper,
(s) Battalio, Robert H., and Paul H. Schultz,
2005, “Options
and the Bubble,” AFA 2005
(s) Goetzmann, William N. and
(r)
B.3. Seasonal Effects
(s) Kamstra,
Mark, Lisa Kramer and Maurice Levi, 2003, Winter Blues: A SAD
Stock Market Cycle, American Economic Review 93(1), 324-343.
(s) Kelly, Patrick J. and J.
Felix Meschke, 2003, "Winter Blues: A
SAD Stock Market Cycle: Comment," Working Paper.