Econometrics of Financial Markets

Fall 2001

Course outline

Econometrics of Financial Markets

Lecturer: Burak Saltoğlu

Aim: This course aims to discus various empirical aspects of finance theory. It both covers the theory and the applied issues in finance and econometrics. Students are asked to to run some regressions and undertake some simulation studies. Some references will be given and discussed about the Turkish financial data.

Main textbook:

Campbell J. Y, Lo A and Mac Kinlay A.C (1997), The Econometrics of Financial Markets, Princeton University Press. (referred as :CLoM).

Supplementary books:

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

A. Pagan and A. Ullah (1999), Nonparametric Econometrics, Cambridge University Press.

Lecturing: There will be 3 hours of lectures for each topic. Students are expected to complete empirical term papers and theoretical surveys on two topics.

Assessment: Students will be asked to complete two term papers and one final exam.

First Essay 20%

Second Essay 20%

Group Project 10%

Final Exam 50%

Topics to be covered

1. Market efficiency and asset return predictability (Week 1-3)

Brock W., Lakhonishok, J B. Le Baron (1992), Simple Technical Trading Rules and the Stochastic Properties of tock Returns, Journal of Finance, 47,1731-1764.

CLoM Chapter 1, 2

Fama E. (1970), Efficient Capital Markets: Areview of the Theory and Empirical Work, Journal of Finance, 25, 383-417.

Fama E.(1991), Efficient Capital Markets II, Journal of Finance.

Fama E. and K.French (1988), Permanent and Temporary Components of Stock Returns, Journal of Financial Economics, 22, 3-27.

Levich R. and Thomas L. (1993), The significance of Technical Trading-Rule Profits in The Foreign Exchange Market: a Bootstrap Approach, Journal of International Money and Finance , 12, 451-474.

Levich M. (1998), International Financial Markets, Chapter 7, International Market Efficiency, Mc Graw Hill, New York.

Other aspects:

A. Return Predictability: Nonlinearity and Long Range Dependence.

B. Event Studies

2. Nonlinearity and Time Varying Risk and Volatility Models (week 4-5)

Engle R. (1994), Selected Papers on ARCH, Chapters 1,2,3,4. OUP.

Studies on Turkish Financial Market:

Güneş H and Saltoğlu (1998), ISE Return Volatility, IMKB Publications.

Saltoğlu B and S. Tatlı (2000), Modelling Intraday Volatility: available: mimoza.marmara.edu.tr/~saltoglu

3. Asset Pricing: Mean Variance Analysis, CAPM and APT

Brealey, R. and Myers, S. (1996), Principles of Corporate Finance, Mc Graw Hill, Chapters 7 and 8.

Copeland, T. and Weston, J. (1988), Financial Theroy and Corporate Policy, Adison Wesley, Chapters 6 and 7.

CLoM Chapter 5.

4. Option Pricing and Derivative Trading

Hull (1997), Option Pricing, Mc Graw Hill.

Hutchinson .J, A. Lo and T. Poggio, (1994), A non-parametric Approach to Pricing and Hedging Derivatie Securities via Learning Networks, Journal of Finance, 49, 851-889.

Garcia R., Gençay R. and , (2000), Pricing and Hedging Derivative Securities with Neural Networks and a Homogeneity Hint, Journal of Econometrics, 94, 93-117.

5. Nonparametric and Nonlinear Modelling

Pagan A and Ullah A (2000), Nonparametric Econometrics, Cambridge University Press.

Hardle (1990), Applied Nonparametric Regression, Cambridge University Press.

Ait Sahalia and A Lo (1998), Non-parametric Estimation of State Price Densities, Journal of Finance.

Ait Sahalia and A Lo (2000), Non-parametric Risk management and implied Risk Risk Aversion, Journal of Econometrics, 94, 9-53.

Barnett et al (1997), Journal of Econometrics,

Studies on Turkish data:

Saltoğlu B and M. Çinko (2000) Testing for Presence of Nonlinear Dynamics: An Application with Turkish Gold returns, available in home page.

Saltoğlu (2000), Forecasting with Parametric and Nonparametric Methods: An application with Canadian Montly Data, mimeo.