Prof. G. William Schwert

E-Mail: schwert@mail.ssb.rochester.edu

3-110L Carol Simon Hall

Phone: 275-2470

Fax: 461-5475

Secretary: Helen Johnston, Dewey 3-110M, 275-8127

E-Mail: johnston@mail.ssb.rochester.edu

This course examines a variety of econometric methods for addressing substantively important questions in financial research. It builds on material presented by Jay Shanken in FIN 532. We will have one class meeting per week. Grading will be flexible - students will have input to determine what type of evaluation procedure will be used. There will be several homework problems assigned throughout the quarter. One of the homework assignments will involve replicating and extending some empirical results that are reported in some of the papers we are going to be discussing in class (or in another paper that we mutually agree on).

Jay discussed material on CAPM tests, Bayesian methods, Mean Reversion, Macroeconomic Variables and Stock Returns, and APT tests. This course will cover related material on interest rates, inflation, time-varying conditional expected returns and volatility, and applications of econometric methods to financial problems (e.g., sample selection bias, GMM estimation, or GARCH models). Emphasis will be on the application of empirical methods to financial data.

The reading assignments will be announced in class and will more or less follow the sequence given below. You will be provided with copies of required readings (shown with an asterisk "*" below). I have included additional references, which are not required, for students who want more information on particular topics. These are not on reserve, but copies of these journals are available in the Management Library.

The required text for the course is:

In addition, the following book is recommended for this course:

I will put these books on reserve in the library (if they are available).

There will be several guest lecturers (other faculty members and Ph.D. students). In addition, I will ask each student who is registered for the course to be responsible for leading the discussion of one or more related papers during some part of the course. Of course, I will be available to help you plan your lecture, and I will supplement what you say in class. You should find a topic that interests you and volunteer early.

This course is intended to help you overcome fear of using new methods to analyze problems that interest you. If you have a specific topic or area of interest that is not currently on the outline, I would be glad to consider adding/substituting that material into the course.

Course Information on the Wide World Web (WWW)

Most of the materials for this course will be posted on the home page for this course [http://www.ssb.rochester.edu/fac/schwert/f533.htm]. For example, I plan to post copies of the assignments as HTML and./or as Adobe Acrobat PDF files (so they can be viewed and printed from a microcomputer attached to the WWW). In addition, I will use the home page for posting information about future class meetings, etc., so you should check regularly to see if new information is available.

READINGS

I. Time-Varying Expected Returns

  1. *JH, Chap. 4 (read earlier chapters if you have not taken APS 420).

  2. *Nelson, Charles R., and G. William Schwert, "On Testing the Hypothesis that the Real Rate of Interest is Constant," American Economic Review, 67 (June 1977) 478-486.

  3. *JH, Chap. 14 (very good exposition on GMM).

  4. *Kang, Jangkoo, "Bond Mutual Fund Performance Evaluation: The Numeraire Portfolio Approach," working paper, University of Rochester, 1996
    • (we are going to focus on the GMM estimation).

  5. *Ferson, Wayne E. and Ravi Jagannathan, "Econometric Evaluation of Asset Pricing Models," Federal Reserve Bank of Minneapolis, Staff Report No. 206, January 1996.

  6. *Campbell, John, "Stock Returns and the Term Structure," Journal of Financial Economics, 18 (June 1987) 373-399.

  7. CLM, Chaps. 8, 10, and 11.

  • B. Mean Reversion in Prices and Other Predictable Components of Returns

    1. *CLM, Chaps. 2 and 7.

    2. *JH, Chaps. 15 and 17.

    3. *Richardson, Matthew and James H. Stock, "Drawing Inferences from Statistics Based on Multi-year Asset Returns," Journal of Financial Economics, 25 (December 1990) 323-348.

    4. Fama, Eugene F., "Efficient Capital Markets II," Journal of Finance, 46 (December 1991) 1575-1617.

    5. Campbell, John Y., "A Variance Decomposition for Stock Returns," The Economic Journal, 101 (March 1991) 157-179.

    6. Campbell, John Y. and Robert Shiller, "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, 1 (Fall 1988) 195-228.

    7. Campbell, John Y. and Robert Shiller, "Cointegration and Tests of Present Value Models," Journal of Political Economy, 95 (1987) 1062-1088.

    II. Time-Varying Volatility

    1. *CLM, Chap. 12.2.

    2. *JH, Chap. 21.

    3. *Hentschel, Ludger, "All in the Family: Nesting Symmetric and Asymmetric GARCH Models," Journal of Financial Economics, 39 (September 1995) 71-104.

    4. *Schwert, G. William, "Why Does Stock Market Volatility Change Over Time?" Journal of Finance, 44 (December 1989) 1115-1153.

    5. French, Kenneth, G. William Schwert and Robert Stambaugh, "Expected Stock Returns and Volatility," Journal of Financial Economics, 19 (September 1987) 3-29.

    6. Schwert, G. William and Paul Seguin, "Heteroskedasticity in Stock Returns," Journal of Finance, 45 (September 1990) 1129-1155.

    7. Harvey, Campbell R., "Time Varying Conditional Covariances in Tests of Asset Pricing Models," Journal of Financial Economics, 24 (October 1989) 289-317.

  • B. Nonparametric and regime-switching models

    1. *Turner, Christopher M., Richard Startz and Charles R. Nelson, "A Markov Model of Heteroskedasticity, Risk and Learning in the Stock Market," Journal of Financial Economics, 25 (November 1989) 3-22.

    2. *Pagan, Adrian R. and G. William Schwert, "Alternative Models for Conditional Stock Volatility," Journal of Econometrics, 45 (July 1990), 267-290.

    3. *Izenman, Alan Julian, "Recent Developments in Nonparametric Density Estimation," Journal of the American Statistical Association, 86 (March 1991) 205-224.

    4. *Boudoukh, Jacob, Matthew Richardson, Richard Stanton, and Robert F. Whitelaw, "The Pricing and Hedging of Mortgage-backed Securities: A Multivariate Density Estimation Approach," working paper, New York University, 1994.

    III. Limited Dependent Variable Models & Sample Selection Bias

    IV. Speed of Adjustment to Macroeconomic Information

    A full-text version of this course outline is available in Acrobat's portable data format (.pdf). The file is about 30K and can only be viewed (and printed) using a copy of Acrobat Reader. If you do not have a copy of this program, you may download it now [this is a self-extracting ZIP file that you must install on your computer to read PDF files]. Click here to download the full text of the FIN 533 course outline.

    Return to FIN 533 Home Page