ECON 643: Financial Economics II

Winter 2011, Department of Economics, Concordia University

Course Materials

Course Outline

Suggested Topics and Readings for Term Projects

Topics

            Week 1: Empirical Properties of Asset Returns

            Week 2: Diffusion Processes and Ito's Lemma

            Week 3: Introduction to Option Pricing and Derivation of the Black-Scholes Formula

            Week 4: Extensions of the Black-Scholes Model and Option Pricing with Stochastic Volatility and Jumps

                      Nandi, S. and D. Waggoner (2000), Issues in Hedging Options Positions, Economic Review, Federal Reserve Bank of Atlanta, First Quarter, 24-39
                      Backus, D., Foresi, S., Li, K., and L. Wu (2004), Accounting for Biases in Black-Scholes, Working Paper, Stern School of Business
                      A Special Report on the Future of Finance, The Economist, January 24th, 2009   
                      Hull, J. and A. White (1987), The Pricing of Options on Assets with Stochastic Volatility, Journal of Finance, 42, 281-300
                      Merton, R.C. (1976), Option Pricing When Underlying Stock Returns are Discontinuous, Journal of Financial Economics, 3, 125-144
                      Bakshi, G., Cao, C., and Z. Chen (1997), Empirical Performance of Alternative Option Pricing Models, Journal of Finance, 52, 2003-2049

                      GAUSS code for computing option prices with stochastic volatility: with leverage effect and without leverage effect

            Week 5: Continuous-Time Models of Spot Interest Rate, Bond Pricing and Term Structure of Interest Rates

                      Cox, J.C., Ingersoll, J.E. Jr., and S.A. Ross (1985), A Theory of the Term Structure of Interest Rates, Econometrica, 53, 385-408
                      Vasicek, O.A. (1977), An equilibrium characterization of the term structure, Journal of Financial Economics, 5, 177-188
                      Fisher, M. (2004), Modeling the term structure of interest rates: An introduction, Economic Review, Federal Reserve Bank of Atlanta, Third Quarter, 41-62
                      Piazzesi, M. (2003), Affine Term Structure Models, Handbook of Financial Econometrics

            Week 6: Modeling the Dynamics of Commodity Prices and Valuation of Commodity Contingent Claims

                      Gorton, G, and K.G. Rouwenhorst (2005), Facts and Fantasies about Commodity Futures, Financial Analysts Journal, 62, 47-68
                      Pindyck, R.S. (2001), The Dynamics of Commodity Spot and Futures Markets: A Primer, Energy Journal, 22, 1-29
                      Black, F. (1976), The Pricing of Commodity Contracts, Journal of Financial Economics, 3, 167-179
                      Gibson, R., and E.S. Schwartz (1990), Stochastic Convenience Yield and the Pricing of Oil Contingent Claims, Journal of Finance, 45, 959-976
                      Schwartz, E.S. (1997), The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging, Journal of Finance, 52, 923-973
                      Casassus, J., and P. Collin-Dufresne (2005), Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates, Journal of Finance, 60, 2283-2331

            Week 7: Review and Problem Solving

            Week 8 (March 2): Midterm Exam

            Week 9: Asset Pricing: Stochastic Discount Factor Approach, Linear Factor Models

                      Cochrane, J.H. (1999), New Facts in Finance, Economic Perspectives XXIII (third quarter), Federal Reserve Bank of Chicago, 36-58.
                      Ferson, W.E. (2003), Mulitfactor Pricing Models, Volatility Bounds and Portfolio Performance, Ch. 12 in Handbook of the Economics of Finance, 743-800.
                      Jagannathan, R., Skoulakis, G., and Z. Wang (2002), Generalized Method of Moments: Applications in Finance, Journal of Business and Economic Statistics, 20, 470-481
                      Robotti, C. (2002), Asset Returns and Economic Risk, Economic Review, Federal Reserve Bank of Atlanta, Second Quarter, 13-25 
                      Cochrane, J.H. (2008), The Dog That Did Not Bark: A Defense of Return Predictability, Review of Financial Studies, 21, 1533-1575.
                      Campbell, J.Y., and S.B. Thompson (2008), Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?, Review of Financial Studies, 21, 1509-1531.
                      Welch, I. and A. Goyal (2008), A Comprehensive Look at The Empirical Performance of Equity Premium Prediction, Review of Financial Studies, 21, 1455-1508.

            Week 10: GMM Estimation of Asset Pricing Models

                      Jagannathan, R., Skoulakis, G., and Z. Wang (2002), Generalized Method of Moments: Applications in Finance, Journal of Business and Economic Statistics, 20, 470-481
                      Burnside, C. (2007), Empirical Asset Pricing and Statistical Power in the Presence of Weak Risk Factors, NBER Working Paper No. 13357
                      Kan, R. and C. Robotti (2008), Specification Tests of Asset Pricing Models Using Excess Returns, Journal of Empirical Finance, 15, 816-838
                      Kan, R. and C. Robotti (2009), Model Comparison Using the Hansen-Jagannathan Distance, Review of Financial Studies, 22, 3449-3490

            Week 11: Project Presentations: Part I

            Week 12: Project Presentations: Part II

            Week 13: Project Presentations: Part III

Assignments