MF 863: Empirical Asset Pricing

MF 863: Empirical Asset Pricing

Fall 2009

Instructor: Pierluigi Balduzzi

Office: 438 Fulton Hall

Office Hours: M 2-3 and by appointment

Telephone: (617) 552-3976

Objectives. This course is intended to familiarize you with empirical applications in the area of asset pricing. While the ultimate focus is on empirical applications, most of the class discussion will center around the theories and methodologies behind the applications.

Here’s a tentative list of topics that we will discuss:

§ Pricing Kernels: helicopter tour

1. The Euler Equation

2. Pricing kernels in complete and incomplete markets

3. Pricing kernels and the C-CAPM

4. Pricing kernels and interest rates

5. Pricing kernels and exchange rates

6. Pricing kernels and risk premia

7. Pricing kernels and the CAPM

8. The equity-premium and risk-free rate puzzles

9. Pricing kernels and market efficiency

§ Term structure theory

1. YTM and local EH

2. Discrete- and continuous-time models

3. Single-factor and multi-factor models

4. Estimation issues

§ Portfolio theory

1. Conditional and unconditional MV efficiency

2. Shrinkage estimators

3. Portfolio optimization as an estimation problem

§ Estimating and testing asset pricing models

1. The GMM approach to inference

2. SDF and multi-beta representations

3. Traded and non-traded factors

4. Hansen-Jagannathan variance bound and distance

Textbooks and articles. The required textbook for the course is:

Cochrane, “Asset Pricing,” 2005, Princeton University Press

The recommended textbook for this course is:

Campbell, Lo, and MacKinlay, “The Econometrics of Financial Markets,” 1997, Princeton University Press

In addition, we will go over several articles. Links to the PDF files of the relevant articles are posted on this website.

Handouts. On this page there are links to the handouts that we will cover in class. You are responsible for printing out your own copy of the handouts. Note that each handout may take more or less than one class meeting and we may also decide to skip some of the handouts in part or entirely. Right now, you can find posted last year’s versions of the handouts. Revised versions of the handouts will be posted soon after the corresponding topic has been covered. In addition, I may also add new handouts and related articles.

Problem sets. For each handout, there is a problem set to help you review the material. Each week, I will assign problems from the problem sets, which will be due the following week. I expect you to work in groups (up to four people) on these problems. You only need to turn in one copy per group.

Student presentations. The last two class meetings will be student presentations. I expect each of you to present a paper of your choice in the area of empirical asset pricing. I encourage you to present either a working paper or an article of recent publication.

There will be two presentations for each class meeting and I will decide the sequencing of the presentations. We must agree on the papers that you intend to present no later than November 23. Yet, the sooner you let me know, the better, so that we can coordinate on the coverage of the topics.

After we have agreed on the papers, you have to meet with me with a draft of your presentation at least one week before the presentation. You are expected to produce a set of slides for your presentation. By the Friday before your presentation, you will e-mail to me two PDF files, one for your slides and one for the paper that you intend to present.

Projects. Three data projects (see below) are due on the following dates:

§ November 2

§ November 30

§ December 21

As with the problem sets, I expect you to work in groups (up to four people) on these projects. You only need to turn in one copy per group.

Final. The final exam is December 21, 3:00-5:30. The final exam is closed books. The questions on the final will be based on the material in the handouts and the problems in the problem sets.

Evaluation.

§ Projects: 30%

§ Presentations: 20%

§ Problems: 20%

§ Final: 30%

Topics, etc.:

1. Pricing Kernels: Helicopter Tour

Handout

Problem set

Articles:

Ferson (2003)

Constantinides and Duffie (JPE, 1996)