Empirical Methods in Finance (FINC-970-0)
This advanced course is designed for students with strong quantitative skill who want to learn modern disruptive discoveries in investments research and state-of-the-art statistical techniques of portfolio management. Students will learn cutting-edge econometric methods for analyzing financial markets and programming techniques to implement them. We will cover financial models from up-to-date research literature and examine "how" and "when" markets are beatable. Students who plan to work in financial industry under a technical capacity, such as, as a quantitative portfolio manager (or, as a risk manager) in hedge funds or investment banks, are expected to find this course immensely rewarding.
Topics Include (but are not limited to):
(1) Multi-factor models, such as the Fama-French factors, momentum strategies, and liquidity factors
(2) Return predictability
(3) Stochastic nature of volatility and structuring options portfolio to receive variance risk premium
(4) Term structure of riskfree rates, yield curve modeling and risk-factors in bond premium
(5) Effects of illiquidity or transaction costs
Necessary statistical methods such as the Fama-MacBeth regression, GRS test, GMM, factor extraction via principal component analysis, It¿'s lemma and stochastic calculus (including jumps), bootstrapping of yield curve, and the techniques of Monte Carlo simulation will be developed within the course. Course grade will be based on five bi-weekly assignments (these assignments will require extensive statistical analysis of investment models and financial data, either in MATLAB or in Excel or in your choice of software) and a final comprehensive take-home project. Students will have unrestricted access to the WRDS database of financial data for working on the assignments and test.
- MATLAB: Expertise in running regression and doing statistical analysis in Excel (or in another platform, such as, MATLAB) is required. Starting from the second week of the quarter, MATLAB tutorial sessions will meet throughout the quarter on Mondays 6:30PM - 8:00PM at Jacobs 4214. Attendance in the tutorial sessions is expected and very strongly recommended, especially as hedge funds seem highly impressed with MATLAB abilities.
- Skills: Students must be comfortable with handling statistics and algebra in paper-and-pencil at the level of hypotheses testing, linear regression analysis, elementary matrix algebra, and basic differential and integral calculus (including Taylor series expansion).
- Prerequisites: Finance/Economics at the level of FINC 460-0. Knowledge of the prerequisite courses is necessary to succeed in this class, but hard-working well-motivated students may request waiver from the prerequisite courses by contacting the instructor via e-mail.
Attendance by any student without proper course registration is strictly prohibited.
Prerequisites: All Students:
(FINC-465-0 OR FINC-464-0) AND FINC-460-0
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