PhD
Course: Empirical Asset Pricing

Prof. Andrea Buraschi

TAs: Andrea Carnelli, Paul Whelan

Spring 2011

This is a PhD
level course in empirical asset pricing. We will start (a) by studying GMM, a general
and powerful econometric technique that is very useful in asset pricing
techniques. Then, we will examine empirical tests of asset pricing models that
have becomes classics approaches in the literature. We will motivate the
methodological discussion on Testing Asset Pricing Models by first learning
about the broad issue of *predictability*
in asset pricing. First, we will address the issue of (i)
predictability in the time-series (dividend-yield, consumption wealth ratio,
cay, tay, and Fama-French), then (ii) predictability in the cross-section
(Fama-MacBeth, Santos and Veronesi)). We will then
address the general question of how to test asset pricing models. Finally, we
will focus on recent advances in the empirical fixed income.

**Lecture
Notes:**

Lecture Notes:

**Lecture
1: The GMM Approach to Testing Asset Pricing Models**

PhDEmpiricalFinanceLecture1.pdf

**Lecture
2: Testing Asset Pricing Models: Methodology and Evidence **

PhDEmpiricalFinanceLecture2.pdf

**Lecture
3: Predictability in the Time Series: Empirical Evidence and Tests**

PhDEmpiricalFinanceLecture3.pdf ; PhDEmpiricalFinanceLecture3_Appendix.pdf

**Lecture
4: Predictability in the Cross-Section: Empirical Evidence and Tests**

PhDEmpiricalFinanceLecture4.pdf

**Lecture
5: Bond Return Predictability: Reduced Form Models **

PhDEmpiricalFinanceLecture5.pdf ;

**Lecture
6: Term Structure Modeling**

PhDEmpiricalFinanceLecture6.pdf

Assignments

Assignment2.pdf Data Needed (Inflation.xls, RiskFree.xls, VW Returns CRSP.xls)

** **

**Examination:**

·
50% - 2
assignments (the first covering the lectures 1-3, the second one lectures 4-6)
to be handed in at the end of the term

·
50% -
3 hour closed-book exam based on the class slides and readings marked by (**EXAMINABLE**) below

**Reading
List:**

**1)
GMM **

·
**EXAMINABLE** : Asset Pricing, J. Cochrane, 2005:
chapters 10 (*) and 11 (*)

·
Time
Series Analysis, J. D. Hamilton, 1994: chapters 7, 10.5, e 14.

·
Hansen,
Lars Peter, 1982, Large Sample Properties of Generalized Method of Moments
Estimators, Econometrica 50, 1029-1054.

·
Hansen,
L.P., and K. J. Singleton, 1982, Generalized Instrumental Variables estimation
of Nonlinear Rational Expectations Models, Econometrica
50, 1269-1288

**2)
TESTS OF ASSET PRICING MODELS**

·
**EXAMINABLE** : Asset Pricing, J. Cochrane, 2005:
chapters 12 -16

·
Black, F., Jensen, M, and M. Scholes, 1972, The Capital Asset Pricing Model: Some
Empirical Tests, in Michael Jensen (ed.), Studies in the Theory of Capital
Markets, Praeger, New York

·
Fama, E. F., and J.
MacBeth, 1973, Risk Return and Equilibrium: Empirical
Tests, Journal of Political Economy 71, 607-636

·
Gibbons, M., Ross, S. A., and J. Shanken, 1989, A Test of The Efficiency of a Given
Portfolio, Econometrica 57, 1121-1152

·
Shanken, J., 1992, On
the Estimation of Beta Pricing Models, Review of Financial Studies 5, 1-34

**3)** **Predictability
in the Time Series**

·
Brennan, M.J., and
Y. Xia, 2005, Tays as good as cay, Finance Research
Letters 2, 114.

·
Campbell, J.Y.,
A.W. Lo, A.C. MacKinlay, and R.F. Whitelaw, 1997, The econometrics of financial markets vol. 611. (princeton University press
Princeton, NJ).

·
Campbell, J.Y.,
and N.G. Mankiw, 1989, Consumption, income, and
interest rates: Reinterpreting the time series evidence, NBER macroeconomics annual pp.
185216.

·
Campbell, J.Y.,
and R.J. Shiller, 1988, The
dividend-price ratio and expectations of future dividends and discount factors, Review of
Financial Studies 1, 195.

·
-Campbell, J. Y., and S. B. Thompson.
2007. Predicting the Equity Premium Out of Sample: Can Anything Beat the
Historical Average? *Review of Financial Studies*, forthcoming.

·
-Clark, T. E., and M. W. McCracken.
2001. Tests of Forecast Accuracy and Encompassing for Nested Models. *Journal
of Econometrics *105:85110.

·
Cochrane, J.H.,
2001, Asset pricing vol. 14. (Princeton University Press Princeton, NJ).

·
Cochrane, J.H.,
2008, The dog that did not bark: A defense of return
predictability, Review of Financial Studies 21, 1533.

·
-Cooper, I., and
R. Priestley, 2009, Time-varying risk premiums and the output gap, Review of Financial Studies 22, 2801.

·
Fama, E.F., 1970, Efficient
capital markets: A review of theory and empirical work, Journal of finance 25, 383417.

·
Fama, E.F., and R. Kenneth, 1989, French,
1988, Dividend yields and expected stock returns, Journal of Financial Economics 22, 325.

·
-Goyal, A., and I. Welch. 2003.
Predicting the Equity Premium with Dividend Ratios. *Management Science *49:63954.

·
-Goyal, A., and I.
Welch. 2006. A Comprehensive Look at the Empirical Performance of Equity
Premium Prediction. *Review of Financial Studies*, forthcoming.

·
Grossman, S.J.,
and J.E. Stiglitz, 1980, On
the impossibility of informationally efficient markets, The American Economic Review 70,
393408.

·
LeRoy, S.F., and R.D. Porter, 1981, The present-value relation: Tests based on implied variance
bounds, Econometrica: Journal of the Econometric
Society 49, 555574.

·
Lettau, M., and S. Ludvigson,
2001, Consumption, aggregate wealth, and expected stock returns, the Journal of Finance 56,
815849.

·
Lettau, M., and S.C. Ludvigson,
2005a, Expected returns and expected dividend growth, Journal of Financial Economics 76, 583626.

·
Lettau, M., and S.C. Ludvigson,
2005b, tays as Good as cay:
Reply, Finance Research Letters 2, 1522.

·
Malkiel, B.G., and B.G. Malkiel,
1985, A random walk down Wall Street. (Norton New
York).

·
Shiller, R.J., 1981, Do stock prices move too
much to be justified by subsequent changes in dividends?, The
American Economic Review 71, 421436.

**4)
**** ****Predictability
in the Cross Section**

·
**EXAMINABLE** : Asset Pricing, J. Cochrane, 2005:
chapters 20.2

·
Fama, Eugene and
Kenneth French, 1996, Multifactor Explanations of Asset Pricing Anomalies, Journal of Finance 51, 55-84

·
Fama, Eugene F., and Kenneth R. French 2006, Dissecting
Anomalies, Journal of Finance 63, 1653-1678.

·
Asness, Cliff, Toby Moskowitz
and Lasse Pedersen, June 2009, Value and Momentum
Everywhere, Manuscript, University of Chicago

·
Menzly, Santos and Veronesi, Understanding Predictability, Journal of Political Economy, 112, 1,
February 2004.

*·
*Buraschi,
Porchia and Trojani, *The Cross-Section of Expected
Stock Returns: Learning about Distress and Predictability in Heterogeneous
Orchards, Working paper.*

**4) Fixed
Income Models**

·
Ang, A., and M. Piazzesi,
2003, A no-arbitrage vector autoregression
of term structure dynamics with macroeconomic and latent variables, Journal of
Monetary economics 50, 745787.

·
Buraschi, A., 2007, Habit formation and
macroeconomic models of the term structure of interest rates, Journal of
Finance 62, 3009 3063.

·
Campbell, J.Y., and R.J. Shiller, 1991, Yield spreads and interest rate movements: A
birds eye view, The Review of Economic Studies 58, 495514.

·
Cheridito, P., D. Filipovic,
and R.L. Kimmel, 2007, Market price of risk specifications for affine models:
Theory and evidence, Journal of Financial Economics 83, 123170.

·
Cochrane, J.H., and M. Piazzesi, 2005, Bond risk premia,
American Economic Review pp. 138160.

·
Cooper, I., and R. Priestley, 2009,
Time-varying risk premiums and the output gap, Review of Financial Studies 22,
2801.

·
Cox, J.C., J.E. Ingersoll Jr, and S.A. Ross, 1985, A theory
of the term structure of interest rates, Econometrica
53, 385407.

·
Dai, Q., and K. Singleton, 2000,
Specification analysis of term structure of interest rates, Journal of Finance
55, 194378.

·
Diebold, F.X., G.D. Rudebusch,
et al., 2006, The macroeconomy
and the yield curve: a dynamic latent factor approach, Journal of Econometrics
131, 309338.

·
Duffee, G.R., 2002, Term premia
and interest rate forecasts in affine models, Journal of Finance pp. 405443. D

·
Duffee, G., 2008, Information in (and not in)
the term structure, Working paper, Working Paper, Working Paper, Johns Hopkins
University.

·
Duffie, D., and R. Kan, 1996, A yield-factor model of interest rates, Mathematical Finance
6, 379406.

·
Fama, E.F., 1984, The
information in the term structure, Journal of Financial Economics 13, 509528.

·
Fama, E.F., and R.R. Bliss, 1987, The information in long-maturity forward rates, The American
Economic Review 77, 680692.

·
Fontaine, J.S., and R. Garcia, 2008,
Bond Liquidity Premia, working paper.

·
Hansen, L.P., and R.J. Hodrick, 1983, Risk averse speculation in the forward
foreign exchange market: An econometric analysis of linear models, Exchange
rates and international macroeconomics (University of Chicago Press, Chicago,
IL) pp. 113142.

·
Haubrich, J.G., P.H. Ritchken,
and G. Pennacchi, 2011, Estimating real and nominal
term structures using Treasury yields, inflation, inflation forecasts, and
inflation swap rates, Federal Reserve Bank of Cleveland Working Paper 51,
61801.

·
Huang, J., and Z. Shi, 2009,
Determinants of Bond Risk Premia,

·
Joslin, S., M. Priebsch,
and K.J. Singleton, 2009, Risk premium accounting in macrodynamic
term structure models, Working paper, Working Paper.

·
Krishnamurthy, A., and A. Vissing-Jorgensen, 2007, The demand for Treasury debt,

·
Ludvigson, S.C., and S. Ng, 2009, Macro factors
in bond risk premia, Review of Financial Studies.

·
Porchia, P., and F. Trojani, 2009,
Ambiguity Aversion and the Term Structure of Interest Rates, Swiss Finance
Institute Research Paper Series.

·
Rudebusch, G.D., and T. Wu, 2008, A
Macro-Finance Model of the Term Structure, Monetary Policy and the Economy*, The Economic Journal 118, 906926.

·
Shiller, R.J., 1979, The
volatility of long-term interest rates and expectations models of the term
structure, The Journal of Political Economy 87, 11901219.

·
Swanson, E.T., 2006, Have Increases in
Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?, Journal of Money Credit and Banking 38, 791.

·
Vasicek, O., 1977, An
equilibrium characterization of the term structure, Journal of financial
economics 5, 177188.

·
Wachter, J.A., 2006, A
consumption-based model of the term structure of interest rates, Journal of
Financial Economics 79, 365399.

·
Xiong, W., and H. Yan, 2009, Heterogeneous
expectations and bond markets, Review of Financial Studies.