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FIN 809: Econometric Methods in Finance Spring 2002

Professor Pin-Huang Chou choup@cc.ncu.edu.tw 886-3-4227151 ext 6270 http://www.mgt.ncu.edu.tw/~chou

Introduction

The main objective is to introduce the empirical methods frequently used in financial studies and the econometric methods that are potentially useful in finance. Hopefully more emphasis will be taken on the ideas embedded in each econometric method developed, rather than on the theoretical derivations. The course is mainly consisted of two parts. The first part, mostly class lectures by me, introduces some important econometric topics including bootstrap methods, the GMM, and possibly some simulation-based methods. The second part introduces empirical methods in finance, focusing mostly on the new textbook by Cambell, Lo, and MacKinlay (CLM, 1997). However, I expect every student read the required articles before the class. I hope that the discussions in class can stimulate research ideas that virtually produce publishable papers.

Grades

. 3 computer assignments: 10%. Sample programs to be distributed in class.
. Term paper: 40%. You should discuss with me the topic by November 15.
. Presentation: 20%. Topics to be assigned.
. Take-home final exam: 20%.
. Class participation: 10%.

Course outline

Overview: Review of econometrics.
Introduction. CLM, Chapter 1; Fama, 1991.
GMM: theories and implementation.
Bootstrap methods. Efron and Tilbshirani, 1993.
Discrete regression models, Maddala, chapter 2.
Limited-dependent variable models, Maddala, chapter 3.
Market microstructure, CLM, chapter 3; O’Hara, 1995.
Predictability of stock returns: CLM, chapter 2.
Tests of the CAPM, CLM chapter 5; time-series and cross-section approaches. Errors-in-variables problems. Multivariate regression model and SUR models.
Tests of multi-factor models, i.e., APT and other models. CLM, chapter 6.
Event study methodology, CLM, chapter 4. Parametric, nonparametric, and bootstrap methods under various scenarios.
Tests of private information. Mutual fund performance evaluation.

Textbooks

1. Cambell, J. Y., A. W. Lo, and A. Craig MacKinlay, 1997, The Econometrics of Financial Markets, New Jersey: Princeton University Press.

2. Anderson, T.W. 1984, An Introduction to Multivariate Statistical Analysis. 2nd ed. New York:Wiley.

3. Efron, Bradley and Robert J. Tishirani, 1993, An Introduction to the Bootstrap.

4. Greene, W. Econometric Analysis, 1997. (A good and updated textbook containing review of recent developments.

5. Hamilton, 1993, Time series analysis. Excellent textbook on time series.

6. Judge et al, Theories and Practices of Econometrics, John Wiley.

7. Maddala, G. S., 1983, Limited-Dependent and Qualitative Variables in Econometrics, (Cambridge University, New York).

8. Muirhead, R.J. 1982, Aspects of Multivariate Statistical Theory. New York: Wiley.

9. O’Hara, 1995 Market Microstructure Theory. Blackwell.

10. Ross, Sheldon M., Simulation, Academic Press.

The first book, CLM, is required, while the remaining are optional. Additional readings for each topic will be assigned 2 or 3 weeks in advance.