New Economic School Professor Patrick J.

Kelly Course Empirics of Financial Markets Module 2 Academic Year 2011-2012 Class Meetings: Thursdays 13.15 to 16.30 Office hours: Wednesdays 14:00 to 16:00 Room: 19-21 E-mail: pkelly@nes.ru

1. The motivation of the course, course description, goals. In previous classes you have gained a wealth of knowledge in economic, financial and econometric theory. In the Empirics of Financial Markets you will put these theories and ideas to the test through careful empirical analysis of real world data, applying methods youve learned in your econometrics courses, as well as techniques learned in this course. We will discuss empirical tests of stock market efficiency and examine applications: 1) speed of stock price adjustment in response to company news announcements and 2) stock return predictability. We will study applications of the CAPM and other multi-factor asset pricing models and learn about empirical econometric methods to control of biases common among younger and less liquid firms and in younger and less liquid markets. We will apply these techniques to the performance evaluation of mutual funds and the development of sector specific relative pricing models. 2. Prerequisites A class in Financial Markets and Institutions. 3. Course structure. Lecture, Projects (Empirical Testing) and Final Exam. 4. Requirements. Theoretical background, econometric methodology, and main empirical findings will be studied during the lectures. The selected articles mostly devoted to the existing evidence on Russian and other emerging markets will be discussed in more detail at the seminars. It is anticipated that students prepare these articles in advance to be ready for the discussion. Active class participation will be rewarded by adjusting the grade upwards when it is on the margin (not to mention the indirect benefits from learning the material in time). 5. Grading system. Please note all lectures and assignments are in English. Assignments/answers written in Russian will receive a grade of zero. The course grade will be based on three empirical projects exercised at home in groups of two people (40%) and a closed-book final exam (60%). The projects will be on common topics; however, each group will use their own data. The exam will be mainly based on the material covered in the class and required readings; the problems will be on the understanding of the main theoretical concepts, methodological issues, and interpretation of the empirical evidence. 6. Exams. One Final Exam

7. Primary texts. 1. [CLM] Campbell, John W., Lo, Andrew W., and A. Craig MacKinlay, Princeton University Press, 1997, The Econometrics of Financial Markets. 2. Cochrane, John, Princeton University Press, 2001, Asset Pricing. 3. [CWS] Copeland, Thomas E., J. Fred Weston, Kuldeep Shastri, Addison Wesley, 2005, Financial Theory and Corporate Policy (fourth edition). 4. [CHS] Edited by Constantinides, G.M., M. Harris and R. Stulz, Elsevier Science B.V., 2003, Handbook of the Economics of Finance [1] is the main textbook for the course. [2] covers a narrower range of topics on a more advanced (PhD) level. [3] is basic readings on the tests of market efficiency. The required articles will be distributed in the reader; other supplementary materials will be made available at the website of the course http://my.nes.ru/. 8. Tentative schedule. 1. Empirical tests of mean-variance efficiency: time-series and cross-sectional tests of CAPM, asset pricing anomalies, and choice of factors in multi-factor asset pricing models Sources: [CLM], ch. 5-6; [Cochrane], ch. 12, 20; [CWS], ch. 7; 2. Market Efficiency and Empirical tests of the predictability of asset returns at short and long horizon Sources: [CLM], ch. 2; [Cochrane], ch. 20; [CWS], ch. 10-11;. 3. Event studies Sources: [CLM], ch. 4; [CWS], ch. 10-11; [6], 3.6. 4. Mutual Fund Performance evaluation and the Morningstar Rating System Sources: Morningstar Rating Methodology 5. Studies of investor behavior: overconfidence, trading rules, and herding Sources: [CHS], ch. 15 and 18 and Barber and Odean (2011) [see below for link]

9. Literature. Mean Variance Portfolio Theory Merton, R., 1972, An Analytic Derivation of the Efficient Set, Journal of Financial and Quantitative Analysis, 1851-1872. The Capital Asset Pricing Model Black, F., 1972, Capital Market Equilibrium with Restricted Borrowing, Journal of Business, 444-455. Ross, S., 1977, The Capital Asset Pricing Model (CAPM), Short Sales Restrictions and Related Issues, Journal of Finance, 177-184. Roll, R., 1977, A Critique of the Asset Pricing Theorys Tests, Journal of Financial Economics 4, 129-176.

Pricing Arbitrage and the APT Roll, R. and S. Ross, 1980, An Empirical Investigation of the Arbitrage Pricing Theory, Journal of Finance, 1073-1103 Fama, E. F., French, K. R., 1992. The crosssection of expected stock returns. Journal of Finance 47, 427465. Fama, E. F., French, K. R., 1993. Common risk factors in returns on stocks and bonds. Journal of Financial Economics 33, 356. Daniel, K., Titman, S., 1997. Evidence on the characteristics of cross sectional variation in stock returns. Journal of Finance 52, 133. The Efficient Markets Hypothesis Fama, E., L. Fisher, M. Jensen and R. Roll, 1969, The Adjustment of Prices to New Information, International Economic Review 10, 1-21. Fama, E., 1991, Efficient Capital Markets: II, Journal of Finance 46, 1575-1617. Grossman, S. and J. Stiglitz, 1980, The Impossibility of Informationally Efficient Markets, American Economic Review, 393-408. Behavioral Finance Barber, Brad M. and Terrace Odean, 2011, The Behavior of Individual Investors, University of California Davis working paper. Available at: http://ssrn.com/abstract=1872211. Kamstra, M.J., Kramer, L.A., Levi, M.D., 2003. Winter blues: a SAD stock market cycle. American Economic Review 93, 324343. Kelly, Patrick J. and J. Felix Meschke, 2010. Sentiment and Stock Returns: the SAD anomaly revisited Journal of Banking and Finance, 34(6), 1308-1326