FINANCIAL ECONOMICS (金融经济学大纲)

Ignacio Palacios-Huerta E CONOMICS244MWEconomics8:30-9:50 ofDepartment2002 University SpringBrownFINANCIAL ECONOMICSThis course is intended for Ph.D. students interested in economics and finance. The course presumes previous exposure to undergraduate economics, econometrics and statistics. The accent and intent of this course is to take the student to the frontier of our knowledge in theoretical and, especially, empirical asset pricing finance and to let him/her understand and enjoy the exciting time that academic researchers and high-tech practitioners in this area are enjoying right now. Over the last decade much progress has been made to answer the fundamental questions in macroeconomics and finance. However, the central task of absolute asset pricing finance, which is to understand and measure the sources of aggregate or macroeconomic risk that drive asset prices, is unfinished. Although much empirical work has documented tantalizing stylized facts and links between economic variables and finance, the theory lags behind and we do not have yet a complete model that explains, as opposed to describes, the rich body of empirical evidence. Novel theories and empirical work are subject to a great demand in this field.The course is stated mostly in a discount factor language and is often translated in the traditional expected return-beta or mean-variance language. The major advantages of this approach, common in current academic research, are its universality and simplicity. The accent of the course is on understanding statements of theory, and working with that theory to applications, rather than rigorous or general proofs. The course focuses, in its second part, on current academic research and thus offers a fertile ground of ideas for students that are or may be interested in doing graduate thesis in finance, microeconomics (preference formation), macroeconomics, international economics and applied econometrics dissertation topics. The course goes very lightly over many parts of asset pricing theory that have faded from current applications and are not a cornerstone of modern asset pricing, although they occupied large amounts of attention in the past.Lecture Notes and Readings. The initial part of the course is based on lecture notes. I will distribute most of my own notes. The rest of the course is highly intensive in reading and evaluating several academic papers. Those marked with an asterisk (*) in the enclosed list are required readings for a complete understanding of all material covered in the course. All others are suggested and intended to be additional references to various parts of the course. As the course goes along other relevant papers may be distributed either as required or suggested readings.No single book covers the material in this course. However, various chapters of the book by John Campbell, Andrew Lo and A.C. MacKinlay, The Econometrics of Financial Markets, Princeton University Press, 1997, are directly related to various parts of the course. In any event, it is an excellent book worth owning. The book Asset Pricing, by John Cochrane, Princeton University Press, 2001, is highly recommended. It will be particularly useful for the first part of the course.SYLLABUSThe accent of the course is on understanding the fundamental implications of finance theory, and working with that theory to applications, rather than rigorous or general proofs. Applications and empirical evidence will be emphasized. Basic fundamentals (especially in parts I and II) are thoroughly discussed in lectures notes that will be distributed during the course. The structure of the course is the following:Part I. DISCRETE TIME ASSET PRICING THEORY - WEEKS 1-21. Consumption-Based Modela. Basic Pricing Equationb. Marginal Rate of Substitution / Stochastic Discount Factorc. Consumption-Based Model in Practiced. Alternative Asset Pricing Models: Overview2. The Discount Factora. Contingent Claimsb. Law of One Pricec. No-Arbitrage and Positive Discount Factors3. Mean-Variance Frontier and Beta Representationsa. Expected Return - Beta Representationsb. Mean-Variance frontiersc. Relation between p = E(mx), beta and mean-variance frontiers4. Implications of Existence and Equivalence Theoremsa. Discount Factors vs. Mean, Variance and Beta5. Conditioning Informationa. Conditioning Information in Returnsb. Adding Scaled returnsc. Conditional and Unconditional Models6. Factor Pricing Stories (*)a. Capital Asset Pricing Model (CAPM)b. Intertemporal Capital Asset Pricing Model (ICAPM)c. Comments on CAPM and ICAPMd. Arbitrage Pricing Theory (APT)e. ICAPM vs. APTPart II. INITIAL EMPIRICAL SURVEY -- WEEK 31. Return Predictability2. Present Value Tests3. Factor Pricing Modelsa. The CAPMb. Chen-Roll-Ross Modelc. Investment and Macroeconomic Factorsd. Book to Market4. Consumption-Based Model Testsa. CRRA Utilityb. Durable Goods and Habitsc. State-nonseparabilitiesPart III. HANSEN-JAGANNATHAN BOUNDS FOR DIAGNOSING ASSETPRICING MODELS – WEEK 41. The Basic HJ Bound2. Many Returns-Formulas. Results4. Beyond Mean and Variance5. Diagnostic Tests. Comments7. HJ Bounds with Frictions8. The Comparison of HJ boundsPart IV. ESTIMATING AND TESTING DISCRETE-TIME MODELS –WEEK 51. General Method of Moments (GMM) Estimation and Testing of Asset Pricing Modelsa. GMM in Explicit Discount Factor Modelsb. Applying GMM to Linear Factor Modelsc. Other Uses of GMM2. Diagnostic and Specification Calculations (*)a. Horse Racesb. Prespecified Weighing Matricesc. Testing Moments3. Regression-Based Tests (*)Part V. ASSET PRICING PUZZLES -- WEEKS 6-91. The Returns of Stocks and Bonds2. The Equity Premium Puzzle3. The Risk-Free Rate Puzzle4. The Stockholding Puzzle5. Home Bias and the International Diversification Puzzle6. Some “Partial” Solutions:a. “Preference” Solutions (Habits and Durability, “Catching-Up with the Joneses,”“The Spirit of Capitalism,” Epstein-Zin Recursive Preferences, Campbell-Cochrane “moving” habits)b. “Budget Constraints” Solutions (Liquidity Constraints, Borrowing Constraints,Short-Sale Constraints, Transaction Costs and Incomplete Markets)c. Individual Heterogeneityd. The Role of other Assets7. Some Important Considerationsa. The Horizon of the Analysisb. Who Holds Financial Assets?c. The Consumption and Assets of Stockholdersd. Who should hold financial assets (and which ones)?Part VI. CURRENT AND RECENT TOPICS IN ASSET PRICING FINANCE– WEEKS 10-121. Human Capital Risk and Returnsa. Measurement and Pricing of Human Capital Assetsb. Human Capital and the Market Returnc. Jagannathan-Wang Conditional CAPM with Human Capitale. Campbell’s Risk and Returne. Human Capital and Asset Pricing Puzzles2. Behavioral Financea. Behavioral Anomalies, Paradoxes and Human Natureb. Loss Aversion, Disappointment Aversion, Knightian Uncertainty Aversionc. Hyperbolic vs. Exponential vs. Endogenous Time Discountingd. Behavioral Anomalies and Asset Pricing Puzzlese. Prospect Theory and Asset Prices3. Robustness in Macroeconomics and Finance.Part VII. OTHER TOPICS (*)For example:1. Financial Structure and Risk Sharing2. Endogenous Risk and Financial Innovations3. Globalization and Stock Exchange Competition(*) Some of these topics may be covered if time allows.READING LIST*Abel, Andrew B., “Asset prices under habit formation and catching up with the Joneses,” AmericanEconomic Review Papers and Proceedings, Vol. 80, No. 2, May 1990, pp. 38-42.Aiyagari, S. Rao and Mark Gertler. “Asset Returns With Transactions Costs And Uninsured Individual Risk,” Journal of Monetary Economics, 1991, 27(3), 311-332.*Allais, Maurice “Le Comportement de l’Homme Rationnel devant le Risque: Critiques des Postulats et Axioms de l’Ecole Americaine,” Econometrica 21, 503-546.Allen, F. and D. Gale, 1994, “Limited Market Participation and Volatility of Asset Prices,” American Economic Review 84, 4, 933-955.*Attanasio, O. P. and G. Weber, 1995, “Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey,” Journal of Political Economy, 103, 6, 1121-1157.Bakshi, G., and Z. Chen, 1994, “Baby Boom, Population Aging, and Capital Markets,” Journal of Business, 67, 165-202.*Bakshi, G., and Z. Chen, 1996, “The Spirit of Capitalism,” American Economic Review, March, 133-157. *Brav, A. and C. Geczy, 1996, “An Empirical Resurrection of the Simple Consumption CAPM with Power Utility,” working paper, University of Chicago.Burnside, C., 1994, “Hansen-Jagannathan Bounds as Classical Tests of Asset-Pricing Models,” Journal of Business and Economic Statistics, 1994, 12, 1, 57-79.Barberis, Nicholas, “Investing for the long run when returns are predictable,” University of Chicago,Center for Research on Security Prices, working paper, No. 439, 1997.Barberis, Nicholas, 1996, “How Big Are Hedging Demands? Evidence from Long-Horizon Asset Allocation,” unpublished paper, Harvard University, Cambridge, MA.*Barberis, N., Huang, M. and J. Santos, 1999, “Prospect Theory and Asset Prices,” Forthcoming QJE.*Barsky, Robert B., Miles S. Kimball, F. Thomas Juster, and Matthew D. Shapiro, “Preference parameters and behavioral heterogeneity: An experimental approach in the health and retirement survey,”Quarterly Journal of Economics, May 1997.*Basak, S. and D. Cuoco, 1997, “An Equilibrium Model with Restricted Stock Market Participation,”Rodney L. White Center for Financial Research, Working Paper 001-97.*Baxter, Marianne, and Jermann, Urban. “The International Diversification Puzzle Is Worse than YouThink.” American Economic Review, March 1997, 87(1), pp. 170-80.*Benartzi, S. and R. Thaler, “Myopic Loss Aversion and the Equity Premium Puzzle,” Quarterly Journal of Economics 110, 75-92.*Blanchard, O. J., 1993, “Movements in the Equity Premium,” Brookings Papers on Economic Activity, 2, 1993, 75-138.*Bertaut, Carol C. “Who Holds Stock in the U.S.?: An Empirical Investigation,” University of Maryland, Revised December 1992.*Blume, Marshall E., and Stephen P. Zeldes, “The Structure of Stockownership in the U.S.”, Manuscript, The Wharton School, University of Pennsylvania, March 1993.Bodie, Zvi, Robert C. Merton and William F. Samuelson. “Labor Supply Flexibility and Portfolio Choice InA Life Cycle Model,” Journal of Economic Dynamics and Control, 1992, v16 (3/4), 427-450. Breeden, Douglas T. “An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities.” Journal of Financial Economics 7 (September 1979): 265-96.Campbell, John Y.,“Stock returns and the term structure,” Journal of Financial Economics, Vol. 18, June 1987, pp. 373-399.*________, “Understanding risk and return,” Journal of Political Economy, Vol. 104, April 1996, pp. 298 -345.________. “A Variance Decomposition for Stock Returns.” Economic Journal 101 (March 1991): 157-79. ________. “Intertemporal Asset Pricing without Consumption Data,” American Economic Review, vol. 83, no. 3, 487-512.________. “Asset Prices, Consumption and the Business Cycle,” paper prepared from the Handbook on Macroeconomics, edited by J. B. Taylor and M. Woodford.*Campbell, John Y., and Cochrane, John H. “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior.” December 1999.*Campbell, John Y., and Mankiw, N. Gregory. “Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence.” In NBER Macroeconomics Annual 1989, edited by Olivier J. Blanchard and Stanley Fischer. Cambridge, Mass.: MIT Press, 1989.*Campbell, John Y., and Shiller, Robert J. “Stock Prices, Earnings, and Expected Dividends.” Journal of Finance 43 (July 1988): 661-76.Campbell, John Y., and Robert J. Shiller, “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors,” Review of Financial Studies, Vol. 1, 1988, pp. 195-227.*Campbell, J. Y., A. W. Lo and A. C. MacKinlay, 1997, The Econometrics of Financial Markets, Princeton University Press, Princeton, N.J.Campbell, J. Y. and L. M. Viceira, 1996, “Consumption and Portfolio Decisions When Expected Returns are Time Varying,” NBER Working Paper 5857. Forthcoming QJE 2000.*Campbell, J. Y. and L. M. Viceira, 1997, “Who Should Buy Long-Term Bonds?,” Mimeo, Harvard University, Cambridge, MA.*Canner, N., N. G. Mankiw and D. N. Weil, 1997, “An Asset Allocation Puzzle,” American Economic Review, vol. 87, no. 1, 181-191.Cecchetti, S. G., P. Lam, and N. C. Mark, 1993, “The Equity Premium and the Risk-Free Rate,” Journal of Monetary Economics 31, 21-45.Chen, Nai-fu; Roll, Richard; and Ross, Stephen A. “Economic Forces and the Stock Market.” Journal of Business 59 (July 1986): 383-403.Cochrane, John H. “A Cross-Sectional Test of a Production-Based Asset Pricing Model.” Working Paper no. 4025. Cambridge, Mass.” NBER, March 1992.________. “Permanent and Transitory Components of GNP and Stock Prices.” Quarterly Journal of Economics 109 (February 1994): 241-65.Cochrane, John H., “Volatility Tests and Efficient Markets: A Review Essay,” Journal of MonetaryEconomics, Vol. 27, June 1991a, pp. 463-485.________, “Explaining the variance of price-dividend ratios,” Review of Financial Studies, Vol. 15,1991b, pp. 243-280.*________, “Production-Based Asset Pricing and the Link between Stock Returns and EconomicFluctuations” Journal of Finance, Vol. 41, March 1991, pp. 207-234.________, “The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near Rational Alternatives.” American Economic Review 79, 1989, 319-337.*________, Asset Pricing, Princeton University Press, 2001.*Cochrane, John H., and Lars Peter Hansen, “Asset Pricing Lessons for Macroeconomics,” in 1992 NBER Macroeconomics Annual, Olivier Blanchard and Stanley Fischer (eds.), 1992, pp. 1115-1165. Constantinides, George M., “Theory of Valuation: Overview,” in Theory of Valuation: Frontiers ofModern Financial Theory, Volume I, Sudipto Bhattahcharya and George M. Constantinides (eds.), Totowa NJ: Rowman and Littlefield, 1989, pp. 1-23.*________, “Habit formation: A Resolution of the Equity Premium Puzzle,” Journal of Political Economy, Vol. 98, June 1990, pp. 519-543.*Constantinides, George M., and Darrell Duffie, “Asset Pricing with Heterogeneous Consumers,” Journal of Political Economy, Vol. 104, April 1996, pp. 219-240.*Daniel, Kent and Marshall, David. “The Equity Premium Puzzle and the Risk-Free Rate Puzzle at Long Horizons,” Macroeconomic Dynamics, Vol. 1, No. 1, 1997, pp. 452-484.Deaton, Angus S., 1991, “Saving and Liquidity Constraints,” Econometrica vol. 59, no. 5, 1221-1248. 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