MSC FINANCE

EMPIRICAL FINANCE
Vrije Universiteit Amsterdam
School of Business and Economics

COURSE MANUAL
Academic year 2017-2018
Period 4.2
TABLE OF CONTENTS
1. Course description study guide ...................................................................................................................... 3
2. Course coordinator and lecturers ................................................................................................................... 5
3. Course objectives ........................................................................................................................................... 5
4. Course reading ............................................................................................................................................... 6
5. Form of tuition and course schedule ............................................................................................................... 6
6. Assessment .................................................................................................................................................. 10
7. Study load ..................................................................................................................................................... 10
1. COURSE DESCRIPTION STUDY GUIDE
Weblink to course
description online

Course Code E_FIN_EF

Period 2

Credits 6

Language of tuition English

Faculty School of Business and Economics

Coordinator Prof. Dr. A. Lucas

Lecturers Prof. Dr. A. Lucas

Dr. A. Opschoor
Teaching methods: Lectures, Computer lab sessions, Case work

Level 400

Course objective The student is able to:

 translate a financial research question into a modelling equation that can be

operationalized for statistical or mathematical analysis;

 apply models and methods - ranging from linear regression, maximum

likelihood, time series models and forecasting – to empirical data using
statistical software;

 report and interpret the results of the analysis clearly according to academic
standards.
Course content In this course, students study advanced empirical research methods in finance. The
course refreshes and deepens your understanding of the standard linear regression
model, but also introduces you to a range of generalizations.
You develop a thorough understanding of the concept of inference and the
assumptions and auxiliary assumptions needed for it, and what to do if any of these
assumptions are violated. You also extend your knowledge of alternative models and
estimation methods, including maximum likelihood, non-linear regression, limited
dependent variable models, volatility models, time series models. You also develop a
toolkit to assess model validity and performance, both in-sample and out-of-sample.

Apart from more theory focused lectures, you also actually apply what you learned in
practical assignments using statistical software.

The course covers the following topics:

 Linear regression model: assumptions, diagnostics, dummies, robust
standard errors, panel data, endogeneity;
 Non-linear models: limited dependent variables (logit, probit, tobit);
 Time series models: linear time series, unit roots, volatility models
(GARCH), forecasting.

The course is typically perceived as covering quite some ground. The extent and
scope of the material treated is important given that the course is instrumental to
your success in the Research Project 4.3 and the Thesis later in your programme.

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Form of tuition Lectures (4 hrs/week)
Computer lab sessions (2 hrs/week)
Stata start-off (2 hrs, week 1 only)
Type of assessment Written exam – Individual assessment
Case 1 – Assessment in groups of 2
Case 2 – Assessment in groups of 2

To pass this course, you need a minimum final grade of 5.5 and a minimum grade on
the written exam of 5.0. If you score less than 5.0 on the written exam, your final
grade is equal to that grade. If you score 5.0 or higher, the final grade is given by:

Final grade = 0.70*(Written exam grade) + 0.15*(Case 1) + 0.15*(Case 2).

Course reading Brooks, C. (2014): Introductory Econometrics for Finance. Cambridge University
Press, 3rd ed.

Additional material (including academic journal papers) will be announced and made
available through Canvas.
Entry requirements Bachelor Economics level of mathematics and statistics, including some additional
linear algebra and optimization. In particular, the level of the following international
standard text books (or equivalent) should be mastered:
 Sydsaeter, Hammond, Strom (2012): Essential Mathematics for Economic
Analysis. Prencice Hall.
 Berenson, Levine, Szabat (2014): Basic Business Statistics.
In particular, we assume that all students are familiar with the basics of linear
regression.

Recommended Asset Pricing 4.1

background knowledge Advanced Corporate Finance 4.1

Remarks The software package used in this course is STATA. It is available on VU computers.
We will work with STATA during the computer lab sessions, as this package:
- offers some useful features for panel data and for reporting;
- has a wide user community such that googling for solutions to your specific
issues is easy.
You are allowed to use alternative software if this enables you to complete your task,
as long as your instructors can verify your work easily by running your code (R,
Python, Matlab, …). Alternative software that is only click-and-go (without
accompanying code) is not allowed.

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2. COURSE COORDINATOR AND LECTURERS
Coordinator: Prof. Dr. André Lucas
Contact details: Room: HG7A82
Email: a.lucas@vu.nl
Consultation: by appointment only

Prof. dr. André Lucas Course Coordinator and lecturer

Prof. Lucas is professor of finance and vice-dean for research of Vrije Universiteit –
School of Business and Economics. His research interests include financial
econometrics, systemic risk, credit risk and risk management. He has published in
journals such as the Journal of Econometrics, Journal of Financial and Quantitative
Analysis, Journal of the American Statistical Association, Journal of Business and
Economic Statistics, Review of Economics and Statistics, Journal of Banking and
Finance, Operations Research, Econometrics Journal, and Journal of Empirical
Finance.

Dr. A. Opschoor Lecturer (a.opschoor@vu.nl)

Dr. Opschoor is assistant professor at the Finance department. His research covers
financial econometrics, time series econometrics, risk management, volatility
modeling and copulas. He has published in journals such as the Journal of
Econometrics, Journal of Business and Economic Statistics, Journal of Applied
Econometrics, Journal of Financial Econometrics, Journal of Statistical Software
and Journal of Empirical Finance. He is co-author of the book Time Series Models
for Business and Economic Forecasting (2nd Edition).

3. COURSE OBJECTIVES
Empirical Finance is a core course in the MSc Finance program. In Block 1, you obtained a good understanding
of corporate finance (ACF) and of financial markets, asset pricing, and behavioural finance (AP). In block 2, you
complement this by a good understanding of financial markets and institutions (FMI). These three core courses
provide you with an overview of the vast majority of all research done in finance. The course in Empirical Finance
complements these core finance courses by a more methodological perspective. We study questions like: given a
research topic of your choice (in ACF/AP/FMI/…), what methods do you have available for answering your
research question? How do you set up your research? What are pitfalls? Are there any particular methodological
issues in finance related research? How should you report and discuss your results? And how can you assess
the quality of other academic research?

The course in Empirical Finance is an ideal stepping stone towards the research project in January (RP4.3),
which in turn is an ideal stepping stone towards your thesis. Though the course is typically perceived as “heavy”
due to the abundance of material we cover in a fairly short time, students start appreciating best what they have
accomplished when they implement it in full practice during the research project and the thesis.

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Table 3.1: Course objectives

Academic Skills After successfully completing this course you can:

Bridging Theory and Practice
Professional / Social Skills
Broadening your Horizon
Self-awareness
 design a research set-up and model to investigate a financial research
question of your choice;
 work with models and model equations for typical empirical models in
finance and implement these in statistical software;
 summarize data, analyse models, interpret estimation results and conduct
inference.
After successfully completing this course you can
- translate a financial issue into an empirical academic research question.
After successfully completing this course you can
- report the results of your analysis clearly according to academic standards
under a tight planning.

4. COURSE READING
 Compulsary literature:

1) Brooks, C. (2014): Introductory Econometrics for Finance. Cambridge University Press, 3rd ed.
2) All content discussed during the lectures (including slides).
3) Other material via Canvas.

We will provide links to appropriate research articles dealt with in class. In Canvas, we will indicate which articles
are treated as background material, and which articles are compulsory material for the exam.

5. FORM OF TUITION AND COURSE SCHEDULE

The lectures aim at stimulating your academic skills, and providing you with new knowledge. In this course,
lectures are accompanied by computer lab sessions. The information provided in the lecture is essential for the
assignments and discussions during those sessions. We expect students to come to the lectures well prepared
and to participate in the interaction.

The computer lab sessions aim at making the material come alive and train students in how the methods learnt
in class can actually be applied on empirical data using STATA.

Table 5.1: Course schedule

Week Format Theme/Topics Preparation and processing

 Brooks (Ch 1.1-1.5): basics of

1 empirical research in finance
 Do review questions from Brooks:
3.5, 3.6, 3.7
 Read the abstract of "On the Origins
of Risk-Taking in Financial
Markets", Journal of Finance.
Lecture 1 Linear regression model (Ch 4.1-4.10,
Appendix 4.1):
- Classical Linear Regression Model
(CLRM)
- CLRM assumptions for correct

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 inference
- Main (linear) algebra underlying the
CLRM
- t-stats, p-values and distributional
refresher
 No preparation
Bootcamp STATA intro (if you are versatile in STATA
already, this intro will bring little new):
- Introduction into the basics (and some
more advanced issues) in STATA
- DO files
- Reading in data, plotting, data
summaries
- Regression
- Easy beautiful reporting of (many)
results
 Self study Chapter 4 (linear
regression model; include chapter 3 if
you forgot basics of the linear
regression model, and include
chapter 2 if you forgot basics of stats
and math)
 Process slide pack 1
 Do review questions Brooks: 4.2, 4.4,
4.6, 4.7

 Read Chapter 12.1-12.2

Lecture 2 Logit model (Ch 12.1-12.8; slides)
- What and why of logit models
- Logit and probit
- Estimation by maximum likelihood
- Assessing model adequacy: pseudo
R2, CAP and ROC curves
Marginal effects
 Self study Chapter 12.1-12.8
 Process slide pack 2
 Do exam questions on logit models
Computer lab Linear regression model
- Merging data sets
- Doing simple regressions
- Logit regressions
- Outlier issues
 Read Ch 11.1-11.2: panel data
2 Lecture 3 Linear panel data models (Ch 11):
- What and why of panel data
- Fixed effects / random effects
- Firm / time / other fixed effects
- F-tests, Hausman test
Fixed/random slope effects
 Self study Chapter 11 (panel data)
 Process slide pack 3
 Read Case 1, contact your group
mates, coordinate tasks

 Read introduction Faccio, Marchica,

Mura (2016): “CEO gender,
corporate risk-taking, and the

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 efficiency of capital allocation”.
Lecture 4 Endogeneity and diff-in-diff analyses
(mainly slides; Ch 7.1-7.6)
- Endogeneity: causes and
consequences
- Instrumental variables, 2-stage least
squares
- Relevance condition, exclusion
restriction, weak instruments
- Diff-in-diff analyses, other techniques
 Self study Chapter 7.1-7.6
 Process slide pack 4
 Complete preliminary analyses for
Case I and discuss them in the group
Comp Tutorial Endogeneity and work case I
 Read chapter 5.1-5.2
3 Lecture 5 Misspecified models and the consequences
- Effect of failing auxiliary assumptions
- Robust standard errors (of various
forms)
- Structural breaks and Chow tests
Functional form and RESET / White tests
 Self study Chapter 5
 Process slide pack 5
Lecture 6 Other models and wrap-up (Ch12.9-12.13)
- Tobit models
- Sample selection models
- Peek into machine learling methods,
regression trees, clustering, deep
learning
UPLOAD CASE I
 Self study Chapter 12
 Process slide pack 6
Computer lab Standard errors, other models; case I
 Read Brooks Ch 6.1-6.4 (SKIP the
4 examples) and 6.11.1 – 6.11.3
 Read introduction Crawford,
Fratantoni (2003) Assessing the
Forecasting Performance of Regime-
Switching, ARIMA and GARCH
Models of House Prices
Lecture 7 Univariate Linear Time Series models (I)
- Autocorrelations
- ARMA models
- Estimation of ARMA models
- Diagnostic checking
 Self study Brooks Ch 6.5-6.7
 Process slide pack 7 (until
Forecasting)
 Make self-study questions 1-4 (page
300/301 of Brooks)
Lecture 8 Univariate Linear Time Series models (II)
- Forecasting and conditional
expectations
- Forecast evaluation

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  Read Brooks Ch 6.9-6.11
 Process slide pack 7 (second part)
Computer lab ARMA models
- AC and PAC
- estimation and diagnostics
- forecasting (and evaluation
 Read slide pack 8 (Part I )
5  Read Brooks Ch 9.1-9.7
Lecture 9 Univariate Volatility models (I)
- Volatility (types)
- General model set-up
- ARCH/GARCH models
 Read Brooks Ch 9.8-9.13
 Make self-study questions 1 (a-e)
(page 488 of Brooks)
 Process slide pack 8 (until
Forecasting and Realized
Variances)
Lecture 10 Univariate Volatility models (II)
- Estimating GARCH
- Varieties of GARCH
 Read Case II, contact your group
mates, coordinate tasks
 Self-study Brooks Ch 9.15-9.21
Computer lab Estimating/ GARCH, work on Case II
 Read Introduction of Giot, Laurent
6 (2003) Value-At-Risk for long and
short trading
 Read slide pack 8 (last part)
Lecture 11 Univariate Volatility models (III)
- Forecasting GARCH
- Evaluation of GARCH forecasts using
Realized Variance
- Forecasting and back-testing Value-at-
Risk
 Read Brooks Ch 8.1-8.3
 Read slide pack 9
 Make self-study question 1 (page
412 of Brooks)
Lecture 12 Unit roots
- (non)stationarity and unit roots
- Testing for unit roots
UPLOAD CASE II
 Process slide pack 9
 Make self-study questions 2 and 3
(page 412 of Brooks)
Computer lab Unit roots, discussion Case II

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6. ASSESSMENT
Your overall course grade is based on different components that are presented in the assessment matrix. You
need a minimum overall grade (inclusive case work) of 5.50 to pass the course. The minimum grade needed for
the written exam to pass the course is 5.0. If your grade for the written exam is below 5.0, your written exam
grade is the final grade for the course. If your written exam is 5.0 or above, your case work is added to the written
exam grade in the proportions indicated.

The two empirical cases aim to apply the research methods of the course on a real-world problem. You learn in
groups of two students to analyse the problem, apply the right research methods, conduct the right inference and
write a crisp and concise report with your findings. For each case, you have to hand in a pdf-version via Canvas.

The written exam tests your knowledge, understanding and application skills of the study material. On Canvas,
there are test-exams available of previous years. These tests give you an indication what to expect on the exam.

Note that there is only a second opportunity for the exam; the case components can only be done once. The
grades for the cases remain valid throughout the current academic year (and thus not for the next academic
year).

The assessment matrix provides an overview of the minimum requirements needed to pass this course.
Additionally, the assessment matrix provides an overview of the learning objectives assessed in each of the
different parts.

Table 6.1: Assessment overview

Format % grade Resit Academic Bridging Theory Professional / Broadening your Self-
Yes/ No Skills and Practice Social Skills Horizon awareness
Exam 70 Yes x x
Case I 15 No x x x
Case II 15 No x x x

7. STUDY LOAD
The estimated time students need for basic study activities in this course are:

Preparing the lectures 12 hours

Attending lectures 24 hours
Preparing the computer lab sessions 3 hours
Attending the computer lab sessions 12 hours
Attending and finishing the STATA start-up in week 1 4 hours
Case 1 30 hours
Case 2 30 hours
Self-study and exam preparation 50 hours
Taking the exam 3 hours
Total 168 hours

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