THE LAW OF ONE PRICE AND PURCHASING POWER PARITY



January 16, 2004

UNIVERSITY OF OSLO

Department of Economics

ECON 5110: ECONOMETRICS OF FINANCIAL MARKETS SPRING SEMESTER 2004

Content

This course introduces students to the methods most commonly used in empirical finance. The analysis of different financial markets and instruments will be discussed, as well as how to handle different data frequencies (tic, hourly, daily, weekly, monthly data). Key models and methods: ARCH, GMM, Regime-Switching Models. Prediction of risk and returns; test of CAPM (Capital Asset Pricing Model), stock market prices, derivatives (exchange rates, forwards, options, swaps), term structure models, volatility models (implied, stochastic volatility) elementary microstructure.

Objective

The students will learn aspects of time series econometrics for both stationary and non-stationary variables at different time frequencies, with emphasis on financial variables. They will be able to understand and analyse the most important aspects of the Norwegian and foreign financial markets.

The teaching

Lecturers:

Erik Biørn (EB). Office room: 1218 at Eilert Sundt’s building,

Office hours: Mondays 14:30-15:30 or by appointment.

Telephone 22 85 51 20.

E-mail: erik.biorn@econ.uio.no.

Personal web-page:

Gabriela Mundaca (GM). Office room: 1133 at Eilert Sundt’s building.

Office hours: Thursdays 10:00-12:00 or by appointment.

Telephone 22 85 51 51.

E-mail: gabriela.mundaca@econ.uio.no

Personal web-page:

Seminar leader:

Eivind Bernhardsen: Office room: 1143 at Eilert Sundt’s building.

E-mail: eivind.bernhardsen@econ.uio.no

Teaching Schedule

Lectures:

Mondays 10:15-12:00, room 150 at Harriet Holter’s building at Eilert Sundt’s building, block C over the following 14 weeks: 4th, 5th, 6th, 7th, 8th, 10th, 11th, 12th, 13th, 14th, 17th, 18th, 19th, 20th.

First lecture: January 19, 2004

Last lecture: May 10, 2004

No lectures in weeks 9th, 15th (Easter), and 16th. You will use these last two weeks to write the term paper (home exam).

Seminars:

Fridays 14:15 – 16:00, room 830 at Eilert Sundt’s building, block B over the following 6 weeks: 6th, 8th , 11th , 13th , 17th , 19th

First seminar: February 6th , 2004

Last seminar: May 7th , 2004

The seminars will serve to discuss the problem sets. It is expected an active participation of the students when presenting the solution to the problem sets. At least 4 seminars should be attended.

Regarding the Computer Software, the students need the have knowledge of the econometric software PcGive or another software that can handle ARCH estimation, GMM estimation, and Regime Switching. Short introductory courses on PcGive are given in weeks 3 and 4 at the Department of Economics (cf. web-pages of courses ECON3150/4160, ECON3410/4410, ECON4160). They are recommended if you have forgotten how to use PcGive or you do not have the sufficient background.

Required book

Selected chapters from Christian Gourieroux and Joann Jasiak (G&J) (2001). Financial Econometrics. Princeton University Press.

Topics of the course

(Initials of lecturer in parenthesis)

The main topics to be discussed in the lectures are (subject to change):

1. Overview (EB/GM)

2. Sampling frequency. Autocorrelation and cross correlation. (GM). Literature: G&J: 2.3, 3.3

3. Capital Asset Pricing Model (CAPM) (EB). Literature: G&J: 3.4, 4.2

4. Non-linear autoregressive models for high-frequent data: ARCH, GARCH (EB). Literature: G&J: 6.1.1, 6.1.2, 6.2

5. Stochastic volatility models. (EB). Literature: G&J: 6.3

6. Generalized method of moment (GMM) and Intertemporal models. (EB) Literature: G&J: 8

7. Qualitative factor model and Regime switching. (GM). Literature: G&J: 10.4

8. Present value model and Expectation Hypothesis (GM). Literature: G&J: 7.3, 7.4

9. Analysis based on the Black-Scholes model. Implied volatility (GM) Literature: G&J: 13.1

10. Dynamic models of high-frequency data. Market microstructure. (GM) Literature: G&J: 14.1, 14.2

11. Repetition and summing-up

Examination form

• There will be a compulsory term paper (home exam). The grade given to this paper will count 1/5 of total grade. The problem for the compulsory term paper will be announced April 2. Deadline for returning this term paper is April 22. Solutions will be discussed at extra seminar in either week 19 or 20. Further announcement will be given in the lectures or on the web. The term paper will consist in an empirical work, using a data set provided, and a written presentation of the work. However, students can alternatively choose from two options: (i) Use his/her (appropriate) data to solve this compulsory term paper empirical work (i.e. to make the relevant estimations), or (ii) propose to estimate an empirical model that he/she is interested in using his/her own data set and write a paper on the work.

• There will also be a 3-hour written school exam (counts 4/5 of total grade).

Guidelines for the exam

• It will be a closed book school exam.

• Make sure to study the required chapter in the required book.

• It is equally important to study the lectures notes, problems solved and discussions made in the seminars.

Additional information

• Lecture notes will be made available at the web pages of the course and/or at Erik Biørn’s and Gabriela Mundaca’s homepages, respectively.

• It is strongly recommended that the students attend the lectures. IMPORTANT: Read the corresponding bibliography before you come to classes in order to get at least familiar with some terminology and notation.

Other additional books (not required) on Financial Econometrics and related topics

Brooks, C. (2002): Introductory econometrics for finance. Cambridge University Press. Very elementary

Mills, T.C. (1999): The Econometric modelling of financial time series. Cambridge University Press. Deals mainly with time series aspects.

Campbell, J.Y., Lo, A.W., and MacKinley, A.C. (1997): The econometrics of financial markets. Princeton University Press. Another good exposition of the field. Covers a larger number of subjects and gives to some extent more detaled expositions than Gourieroux and Jasiaks book.

Hamilton, J.D. (1994): Time series analysis. Princeton University Press. A fairly general exposition of time series econometrics.

Franses, P.H., and van Dijk, D. (2000): Non-Linear Time Series Models in Empirical Finance. Cambridge University Press.

Cuthbertson, K. (1996): Quantitative Financial Economics. Stocks, Bonds and Foreign Exchange. Wiley.

Supplementary readings:

Students may consult following list of supplementary readings in accordance to their own interest and needs. For some of the references, a link to the Internet is given while others can be found by looking at or



ARCH

1. Chapters on ARCH,, GARCH modeling in econometrics textbooks:

Greene, W.H. (2003): Econometric Analysis, 5th edition. Prentice Hall, chapter 11.8.

Johnston, J., and DiNardo, J. (1997): Econometric Methods, 4th edition. McGraw-Hill, chapter 6.9 and Appendix 6.3

2. Articles on ARCH, GARCH models:

Engle, R.F. (1994): ARCH. Selected Readings. Oxford University Press.

Bollerslev, T., Engle, R.F., and Nelson, D.B. (1994): ARCH Models. Chapter 49 in Handbook of Econometrics, vol. 4 (ed. by R.F. Engle and D.L. McFadden). Elsevier,

Mundaca, B.G. (1991). The volatility of the Norwegian currency basket. The Scandinavian Journal of Economics 93 (1), 53-73.

Bollerslev, T., Cheu, R.Y., Kroner, K.F. (1992). ARCH modeling in finance: A review of the theory and empirical evidence. Journal of Econometrics 52 (1-2), 5-59.

CAPITAL ASSET PRICING MODEL (CAPM)

1. Chapters in textbooks in financial theory:

Copeland, T.E., and Weston, J.F. (1992): Financial Theory and Corporate Policy, 3rd edition. Addison-Wesley, chapter 7.

Elton, E.J., and Gruber, M.J. (1995): Modern portfolio theory and investment analysis, 5th edition. Wiley.

Other articles:

THE EXPECTATIONS HYPOTHESIS

1. Chapters in textbooks:

Campbell, J.Y., Lo, A.W., and MacKinley, A.C. (1997): The econometrics of financial markets, chapter 10. Princeton University Press.

2. Articles:

McCallum B.T. (1994). Monetary Policy and the term structure of interest rates. NBER Working Paper # 4938, Cambridge, Massachusetts, USA.

Bekaert, G., Hodrick R.J., and D.A. Marshall (2001). Peso problem explanations for term structure anomalies. Journal of Monetary Economics 48, 241 – 270.

Rudebusch, G. D. (1995). Federal Reserve interest rate targeting, rational expectations, and the term structure. Journal of Monetary Economics, 35, 245-274.

REGIME SWITCHING

1. Chapters in textbooks:

Brooks, C. (2002): Introductory econometrics for finance, chapter 9. Cambridge University Press.

Hamilton, J.D. (1994): Time series analysis, chapter 22. Princeton University Press.

2. Articles:

Mundaca, B.G. (2001). Selvoppfyllende forventninger i det norske valutamarkedet: august 1998. Norsk Økonomisk Tidsskrift 115, 41-58.

Mundaca, B.G. (2003). Modelling probabilities of devaluation. Forthcoming in Economica:

Bekaert, G., Hodrick R.J., and D.A. Marshall (2001). Peso problem explanations for term structure anomalies. Journal of Monetary Economics 48, 241 – 270.

Hess, M.K. (2003). What drives Markov regime-switching behavior of stock markets? The Swiss case. International Review of Financial Analysis 12, 527-543.

BLACK-SCHOLES MODEL. IMPLIED VOLATILITY

1. Chapters in books:

McDonald, R.L. (2003). Derivatives Markets, chapter 12. Addison Wesley.

Campbell, J.Y., Lo, A.W., and MacKinley, A.C. (1997): The econometrics of financial markets, chapter 9. Princeton University Press.

2. Articles:

Bollen, N.P.B., S.F.Gray, R.E. Whaley (2000). Regime switching in foreign exchange rates: Evidence from currency option prices. Journal of Econometrics 94, 239-276.

Aguilar, J. (1999). GARCH, implied volatility and implied distributions: An evaluation for forecasting purposes. Riksbanken Working Paper.



MICROSTRUCTURE

1. Chapters in books:

Campbell, J.Y., Lo, A.W., and MacKinley, A.C. (1997): The econometrics of financial markets, chapter 3. Princeton University Press.

2. Articles:

Evans, M. and R. Lyons, 2002, Order flow and exchange rate dynamics, Journal of Political Economy, 110, 170-180.

Madhavan, A., 2000, Market microstructure: A survey, Journal of Financial Markets, 3, 205-258.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download