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


Lecture 2: Testing Asset Pricing Models: Methodology and Evidence


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


Lecture 5: Bond Return Predictability: Reduced Form Models

PhDEmpiricalFinanceLecture5.pdf ;

Lecture 6: Term Structure Modeling





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



·         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




·         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, Tay’s as good as cay, Finance Research Letters 2, 1–14.

·         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. 185–216.

·         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 105:85–110.

·         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, 383–417.

·         Fama, E.F., and R. Kenneth, 1989, French, 1988, Dividend yields and expected stock returns, Journal of Financial Economics 22, 3–25.

·         -Goyal, A., and I. Welch. 2003. Predicting the Equity Premium with Dividend Ratios. Management Science 49:639–54.

·         -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, 393–408.

·         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, 555–574.

·         Lettau, M., and S. Ludvigson, 2001, Consumption, aggregate wealth, and expected stock returns, the Journal of Finance 56, 815–849.

·         Lettau, M., and S.C. Ludvigson, 2005a, Expected returns and expected dividend growth, Journal of Financial Economics 76, 583–626.

·         Lettau, M., and S.C. Ludvigson, 2005b, tay’s as Good as cay: Reply, Finance Research Letters 2, 15–22.

·         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, 421–436.




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, 745–787.

·         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 bird’s eye view, The Review of Economic Studies 58, 495–514.

·         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, 123–170.

·         Cochrane, J.H., and M. Piazzesi, 2005, Bond risk premia, American Economic Review pp. 138–160.

·         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, 385–407.

·         Dai, Q., and K. Singleton, 2000, Specification analysis of term structure of interest rates, Journal of Finance 55, 1943–78.

·         Diebold, F.X., G.D. Rudebusch, et al., 2006, The macroeconomy and the yield curve: a dynamic latent factor approach, Journal of Econometrics 131, 309–338.

·         Duffee, G.R., 2002, Term premia and interest rate forecasts in affine models, Journal of Finance pp. 405–443. 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, 379–406.

·         Fama, E.F., 1984, The information in the term structure, Journal of Financial Economics 13, 509–528.

·         Fama, E.F., and R.R. Bliss, 1987, The information in long-maturity forward rates, The American Economic Review 77, 680–692.

·         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. 113–142.

·         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, 906–926.

·         Shiller, R.J., 1979, The volatility of long-term interest rates and expectations models of the term structure, The Journal of Political Economy 87, 1190–1219.

·         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, 177–188.

·         Wachter, J.A., 2006, A consumption-based model of the term structure of interest rates, Journal of Financial Economics 79, 365–399.

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