FNCE 405v1: Empirical Finance Report a Broken Link

This course examines the major methods and findings in empirical studies in finance, with emphasis on the efficient markets hypothesis and its applications. Topics covered include testability of the capital asset pricing model, arbitrage pricing theory, risk premiums, environmental impacts on financial assets, and even topics in economics such as Uncovered Interest Parity.

Lesson 1


Supplementary Readings
Mergent Online

Lesson 2


Required Readings
Jensen, M.C. The performance of mutual funds in the period 1945-1964 A central problem in finance (and especially portfolio management) has been that of evaluating the "performance" of portfolios of risky investments. The concept of portfolio "performance" has at least two distinct dimensions: 1) the ability of the portfolio manager or security analyst to increase returns on the portfolio through successful prediction of future security prices; and 2) the ability of the portfolio manager to minimize the amount of "insurable risk" born by the holders of the portfolio.

Lesson 3


Required Readings
Jensen, M.C. The performance of mutual funds in the period 1945-1964 A central problem in finance (and especially portfolio management) has been that of evaluating the "performance" of portfolios of risky investments. The concept of portfolio "performance" has at least two distinct dimensions: 1) the ability of the portfolio manager or security analyst to increase returns on the portfolio through successful prediction of future security prices; and 2) the ability of the portfolio manager to minimize the amount of "insurable risk" born by the holders of the portfolio.
Supplementary Readings
University of Toronto, CHASS (Computing in the Humanities and Social Sciences)CANSIM II Statistics Canada's computerized database of time series covering a wide variety of social and economic aspects of Canadian life

Lesson 4


Required Readings
Cormier, D., Magnan, M., & Morard, B. The impact of corporate pollution on market valuation: some empirical evidence

http://chinaenvironment.net/pace/pdf/gw_cme_003.pdf... This paper investigates the relation between the market valuation of publicly listed corporations and their social performance, as measured by their pollution record relative to environmental regulations. Such a relation results from the emergence of “ethical” (or Green) investing and from an increased awareness by investors of the potential negative consequences from corporate environmental damages.

Supplementary Readings
Des Rosiers, F., & Theriault, M. (1996), Rental amenities and the stability of hedonic prices: A comparative analysis of five market segments, This paper applies the hedonic approach to five rental submarkets in the Quebec region.Findings suggest that significant differences in implicit prices do exist across market segments. Also accessible through Google Scholar.

Lesson 5


Required Readings
Thaler, R. H. Anomalies This article focuses on economic anomalies found in U.S. security markets. An economic anomaly is a result inconsistent with the present economics paradigm. Security markets are a good place to look for anomalies for several reasons.
Supplementary Readings
Dr. Paolo Coletti, Critical Values for the Durbin-Watson Statistic Dr. Coletti has compiled data sets to accompany statistical exercises in courses offered at the Free University of Bolzen-Bolzano School of Economics and Management. This is the original D-W test statistic table from which Table 5-1 in the course has been adapted.
Newey, W.K., & West, K.D. A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix. The Newey-West procedure is used to adjust the standard errors in order to correct for both heteroscedasticity and autocorrelation in residuals, in such a way as to make hypothesis testing more conservative.
Wolfram Research MathWorld, Skewness Contains some very readable and understandable explanations and definitions for the principles that underlie the concept of skewness.
Wolfram Research MathWorld, Kurtosis Contains understandable and interesting descriptions and definitions for the principles that underlie the concept of kurtosis.

Lesson 7


Required Readings
Black, F., Jensen, M.C., & Scholes, M.S. The capital asset pricing model: some empirical tests Considerable attention has recently been given to general equilibrium models of the pricing of capital assets, the main result of which is a statement of the relation between the expected risk premiums on individual assets and their "systematic risk." The main purpose of this paper is to present additional tests of this asset pricing model that avoid some of the problems of earlier studies and that provide additional insights into the nature of the structure of security returns.

Lesson 8


Required Readings
Taylor, M. P. Covered interest arbitrage and market turbulence This paper provides a detailed analysis of covered interest arbitrage. Author reveals three major features of the markets during these periods. First, small but profitable arbitrage opportunities occasionally occur during periods of turbulence. Second, the degree of efficiency of markets appears to have increased over the 20-year period spanned by the study. Third, there is a term structure to arbitrage opportunities, whereby few, if any, profitable arbitrage opportunities tend to arise in shorter maturities, while small, but significant and occasionally persistent profitable arbitrage opportunities tend to arise in the longer maturities during turbulent periods.
Giddy, I.H., & Dufey, G. The random behavior of flexible exchange rates: Implications for forecasting This article explores the forecasting accuracy of the "random walk" and other models of exchange rate behavior. Under present conditions of floating exchange rates, it is argued, anticipations of future demand and supply determine fluctuations in exchange rates. The authors present results consistent with the notion that, for the world's major currencies, the foreign exchange market is an "efficient market" and exchange rate forecasting is not profitable.
Carry on speculating The article discusses how investors have been increasingly using the "carry trade" system, in which they borrow or sell currencies with low interest rates and purchase currencies with high rates. The article points out that according to economic theory, the carry trade system should not be successful. Carry trade trends break down when markets become more turbulent, which means if markets become unstable all profit may be lost.

Lesson 9


Required Readings
Giddy, I.H., & Dufey, G. The random behavior of flexible exchange rates: Implications for forecasting This article explores the forecasting accuracy of the "random walk" and other models of exchange rate behavior. Under present conditions of floating exchange rates, it is argued, anticipations of future demand and supply determine fluctuations in exchange rates. The authors present results consistent with the notion that, for the world's major currencies, the foreign exchange market is an "efficient market" and exchange rate forecasting is not profitable.