Course description

Empirical Asset Pricing

Introduction

This course is intended for PhD students in finance and related fields. The
course is an introduction to empirical research in finance. Topics include tests of asset pricing
models, return predictability in time-series and cross-section, conditional and unconditional tests.
The aim is to familiarize students with essential econometric methods and with important empirical
facts and areas of current research interest.

Course content

Some of the  topics that will be covered in class, time permitting and some of the readings. The final list of readiings and an updated sylllabus will be provided at the start of the course..

1. The Predictability of Asset Returns

  • Campbell, Lo and MacKinlay (1997) (CLM) Chapter 2
  • Baker, Malcolm and Jeffrey Wurgler, 2006, Investor Sentiment and the Cross-Section of Stock Returns, Journal of Finance, 61, 1645-1680.
  • Boudoukh, Jacob, Roni Michaely, Matthew Richardson and Michael G. Roberts, 2005, On the Im-portance of Measuring Payout Yield: Implications for Empirical Asset Pricing, Journal of Finance,forthcoming.
  • Fama, Eugene F., and Kenneth R. French, 1988, Dividend Yields and Expected Stock Returns, Journal of Financial Economics, 22, 3-27.
  • Fama, Eugene F., and Kenneth R. French, 1989, Business Conditions and Expected Returns on Stocks and Bonds, Journal of Financial Economics, 25, 23-49.
  • Goyal, Amit and Ivo Welch, 2006, A Comprehensive Look at the Empirical Performance of Equity Premium Prediction, Review of Financial Studies, forthcoming.
  • Lettau, Martin and Sydney Ludvigson, 2001, Consumption, AggregateWealth, and Expected Stock Returns, Journal of Finance, 56, 815-849.
  • Lewellen, Jonathan, 2004, Predicting Returns with Financial Ratios, Journal of Financial Eco- nomics 74, 209-235.

2. Present Value Relations

  • CLM Chapter 7.

3. The Cross-section of Expected Stock Returns

(a) Testing Methodologies: Time-series, cross-section and ML.
(b) Single and Multifactor Models
(c) Explaining Size and Book-to-Market
(d) Conditional Models
(e) Portfolio Formation

  • CLM Chapters 5 and 6
  • Campbell. J.Y., and T. Vuolteenaho, 2004, Bad Beta, Good Beta, AER 94, 1249-1275
  • Daniel and Titman, Testing factor model explanations of market anomalies, Working Paper.
  • Fama and French, 1992, The cross-section of expected stock returns, Journal of Finance 47, 427-465.
  • Fama, E. and J.D. MacBeth, 1973, Risk, return and equilibrium: empirical tests, Journal of Political Economy 81, 607-636.
  • Fama, E. and K. French, 1993, Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33, 1975-1999.
  • Ferson and Harvey, 1991, The variation of economic risk premiums, Journal of Political Economy 99, 385-415.
  • Jagannathan R., and Z. Wang, 1996, The conditional CAPM and the cross-section of expected stock returns, Journal of Finance 51, 3-53.
  • Lettau and Ludvigson, 2001, Resurrecting the (C)CAPM: A cross-sectional test when risk premia are time-varying, Journal of Political Economy 109, 1238-1287.
  • Lewellen, J., S. Nagel and J. Shanken, 2006, A skeptical appraisal of asset-pricing tests, working paper, Dartmouth University.
  • Li, Vassalou, and Xing, Sector investment growth rates and the cross section of equity returns, Journal of Business
  • Liew, J., and M. Vassalou, 2000, Can book-to-market, size and momentum be risk factors that predict economic growth, Journal of Financial Economics, 221-245.
  • McElroy, M.B, E. Burmeister, and K.D. Wall, 1985, Two estimators for the APT model when factors are measured, Economic Letters 19, 271-275.
  • Chen, Roll and Ross, 1986, Economic forces and the stock market, Journal of Business 59, 383-403.
  • Xing, Interpreting the value e¤ect through the q-theory: An empirical investigation, Forthcoming RFS

4. Consumption CAPM

  • CLM Chapter 8

Learning outcome knowledge

  • To understand the testable implications of asset pricing models
  • To understand the implications of time-varying expected returns on tests of asset pricing models
  • To appreciate the importance of international factors in determining asset returns in the data
  • To know the different potential sources of bias in tests of asset pricing models

Exam organisation

  • Presentation: 20%
  • Presentation and discussion: 20%
  • Home exam: 30%
  • Written assignment: 30%