Shanghai University of Finance and Economics

School of Finance

Asset Pricing Theory

Fall 2013

Instructor:
Dr. Xuanjuan(Jane) Chen（陈选娟）
Office: 同德楼302
Email: chen.xuanjuan@mail.shufe.edu.cn
Phone: 021-65904573
Office Hour: Friday 3-5pm or by appointment
The TA for the class is Wu, Xiaowei. His email is victorwxw@163.com

Course Objectives:
This course is a survey of asset pricing theories, including single-factor models, multifactor models and new development in asset pricing. In particular, it covers the classical consumption based model, its GMM estimation and its problems in explaining the reality, and hedge fund investment as an alternative investment which has challenged the traditional asset pricing framework.

Course Materials:
1. Asset Pricing (Revised Edition) John H. Cochrane, Princeton University Press, 2005
2.Hedge funds: An analytic Perspective Andrew W. Lo, Princeton University Press, 2010
3. The Econometrics of Financial Markets John Campbell, Adndrew Lo, and Craig Mackinlay, Princeton University Press, 1997

Grading Scheme:
Homework 10%
Group presentation 10%
Projects 30%
Final Exam 50%

Homework
There is no credit for a late turn-in of the assignments. All assignments will be counted toward your grade. Each assignment carries the same weight. Please write your answers clearly. If there are multiple pages, please staple them! I will provide solutions to homework.
Group Presentation
Students will form groups by themselves. Each group will have 3 members. I will assign a few papers for randomly selected groups to present each class (each group will only present one paper). The responsibilities of the presenting group include: 1) using PPT in the presentation, 2) show the derivation of the main results, 3) comment the contribution and limitation of the paper
Projects
Each group will work on two projects after the lectures are finished. One project is related to the GMM estimation of the consumption-based asset pricing model and the other is open. You can pick up your own project as long as it involves quantitative work. Each project will have 2 weeks to finish. Details of the projects will be announced in the semester.
Final Exam
The final exam will consist of materials covered in the 2013 Summer Camp and this semester.
Policies
Class Preparation: Students are expected to read the assigned chapters and papers before each class. Students are expected to be in a position to both respond to questions on the material and ask questions regarding the assigned subjects.
Class attendance is required. If you are absent for the class, you are responsible for getting lecture notes, class handouts/materials, and being aware of any class announcements, including announcements of homework, and any changes in classes and exam dates.
Bring a name card and put it in front of you each class.

Schedule and reading list (tentative and subject to changes at instructor's discretion):

Week 0
Student self-review the following stuff before the start of the class on 9/2/2013

• Asset Pricing " Preface"
• Continuous time notes p. 13-26 (Sections 2.2-2.4).
• Investments Notes.
  

Week 1
Introduction of asset pricing and basic consumption-based model

• Cochrane, John, 1999, New facts in finance, Economic Perspectives, 1999, 23(3), pp. 36-58.
• Campbell, John, 2000, Asset pricing at the millennium, Journal of Finance August 2000, 1515-1567
• Asset Pricing Ch 1.
  

Week 2
More on consumption-based model

• Asset Pricing Ch. 2, 3, and 4
• Lucas, Robert E. Jr, 1978, “Asset Prices in an Exchange Economy’’ Econometrica 46, 1429-1455.
• Hansen, Lars Peter and Scott F. Richard, 1987, “The Role of Conditioning Information in Deducing Testable Restrictions Implied by Dynamic Asset Pricing Models” Econometrica 55, 587-613.
• Cochrane, John, 2011, "Discount Rates", Journal of Finance August 2011, 1047-1108
  

Week 3
Mean-variance frontier and Beta representations
· Asset Pricing Ch 5 and 6
· Campbell, John, Y., and John H. Cochrane, 1999, By force of habit: a consumption-based explanation of aggregate stock market behavior, Journal of political Economy 107, 205-251
· Other readings: TBA

Week 4
Estimating and evaluating asset pricing models using GMM, three puzzles

• Asset Pricing Ch 10-15
• Mehra, Rajnish, and Edward Prescott, 1985, The equity premium: A puzzle, Journal of Monetary Economics 15, 145-161
• Whitelaw, Robert, F., 2000, Stock market risk and return: An equilibrium approach, Review of Financial Studies 13(3), 521-547
• Veronesi, Pietro, 1999, Stock market overreaction to bad news in good times: A rational expectations equilibrium model, Review of Financial Studies 12, 975-1007
• Kandel, Shmuel, and Robert F. Stambaugh, 1991, Asset returns and intertemporal preferences, Journal of Monetary Economics 27, 37-91
  

Week 5
Conditional CAPM, Intertemporal CAPM, and arbitrage pricing theory (APT)

• Asset Pricing Ch.8 and 9
• reading list: TBA
  

Week 6
Term and risk structure of fixed income securities
· Asset Pricing Ch. 19

• John Cochrane and Monika Piazzesi, 2005, “Bond Risk Premia”, The American Economic Review, March 2005, 138-160
  

· Other readings: TBA

Week 7
Mutual fund performance and stock picking ability
· Daniel, Kent, Mark Grinblatt, Sheridan Titman, and Russ Wermers, 1997, "Measuring mutual fund performance with characteristic-based benchmarks", Journal of Finance July 1997, 1035-1058
· Fama, E., and K. French, 2010, "Luck versus skill in the cross-section of mutual fund returns", Journal of Finance, 2010 October, 1915-1947
· Zheng, Lu, Marcin Kacperczyk and Clemens Sialm, 2008, “Unobesrved Actions of Mutual Funds," 2008, with, The Review of Financial Studies, 21, 2379-2416.

Week 8
Hedge fund performance, serial correlation, and illiquidity
· Hedge Funds Ch. 1-3
· Andrew, Lo and Craig MacKinlay, 1990, An Econometric Analysis of Nonsynchronous Trading, Journal of Econometrics 45 (1990), 181–212.
· Andrew Lo and Craig MacKinlay, 1990, Data Snooping Biases in Tests of Financial Asset Pricing Models, Review of Financial Studies 3 (1990), 431–468.
· Mila Getmansky, Andrew Lo, and Igor Makarov, 2004, An Econometric Model of Serial Correlation and Illiquidity in Hedge-Fund Returns, Journal of Financial Economics 74 (2004), 529–609.

Week 9
Hedge fund: Optimal liquidity, beta and measure of active investment management
· Hedge Funds Ch. 4-6
· Reading list: TBA

Optional
Week 10
Market Efficiency
· Reading list: TBA

Week 11
Behavioral Finance
· Reading list: TBA