Economics 512:  Financial Econometrics

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Syllabus

Spring 2010

Last updated: June 7, 2010

Note: "APDVP" denotes Asset Price Dynamics, Volatility, and Prediction;  "FMUND" denotes Financial Modeling Under Non-Gaussian Distributions , "MFTS" denotes "Modeling Financial Time Series with S-PLUS, Second Edition"; "Tsay" denotes Analysis of Financial Time Series, Second Edition.   * denotes the most relevant reading.

Distribution and dynamic behavior of asset returns

Textbook Readings

Additional Readings

• MFTS, Chapters 2, 3, and 4.
• Tsay, Chapters 1 and 2.
• *FMUND, Chapters 1-3.
• *APDVP, Chapters 2-7.

• Class slides for return definitions and distribution properties of returns (updated 3/29/2010). Powerpoint slides for distribution properties of returns (updated 3/29/2010).
• Review slides: Time Series Concepts  Not covered in class. Slides follow MFTS, Chapter 3. (updated 3/30/2009). Powerpoint slides for Time Series Concepts. (updated 3/30/2009).
• Class slides for market efficiency and return predictability (updated 5/3/2010). Powerpoint slides for return predictability (updated 5/3/2010)
• Cochrane, Asset Pricing, chapter 20
• Lo, A., and A.C. MacKinlay (1988). "Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, 41-66.
• Fama, E. and K. French (1988). "Permanent and temporary components of stock prices," Journal of Political Economy, 96, 246-273. Available in JSTOR.
• Nelson, C.R., and M. Kim (1993). "Predictable stock returns: The role of small sample bias," Journal of Finance, 48, 641-661
• Stambaugh, R (1986). "Bias in regressions with lagged stochastic regressors," CRSP Working Paper 156, University of Chicago.
• Welch, I. and A. Goyal (2008). "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, 21(4), 1455-1508.
• Cochrane, J. (2008). "The Dog That Did Not Bark: A Defense of Return Predictability," Review of Financial Studies, 21(4), 1533-1575.

 Volatility Modeling

Textbook Readings

Additional Readings

• MFTS, Chapters 7, 8, 9, 13 and 14.
• Tsay, Chapters 3, 10 and 11.
• *APDVP, Chapters 8 - 11, 15.
• *FMUND, Chapters 4-6, 8.

• Class slides for univariate GARCH lectures (updated 5/3/2010). Powerpoint slides for univariate GARCH lectures (updated 5/3/2010).
• Class slides for risk management concepts (updated 5/3/2010). Powerpoint slides for evaluating GARCH models using VaR (updated 5/3/2010).
• Class slides for multivariate GARCH lectures (updated 5/3/2010). Powerpoint slides for multivariate GARCH lectures (updated 5/3/2010)
• Class slides for stochastic volatility models (updated 5/3/2010).
• Class slides for estimation of stochastic volatility models (updated 5/3/2010). Powerpoint slides for stochastic volatility lectures (updated 5/3/2010)
• Terasvirta, T. (2008). "An Introduction to Univariate GARCH Models," Handbook of Financial Time Series.
• Lindner, A.M. (2008). Stationarity, Mixing, Distributional Properties and Moments of GARCH(p,q) Processes. Handbook of Financial Time Series.
• Francq, C., and Zakoian, J.-M. (2008). "A Tour in the Asymptotic Theory of GARCH Estimation," Handbook of Financial Time Series.
• Zivot, E. (2008). "Practical Issues in the Analysis of Univariate GARCH Models," Handbook of Financial Time Series. Splus script for examples in paper.
  • practicalGarch.ssc
• Diebold, F.X. and J. Lopez (1995). "Modeling Volatility Dynamics," NBER Technical Working Paper No. 173.
• Engle, R.F. (2001). "GARCH 101: The Use of ARCH/GARCH Model in Applied Economics," Journal of Economic Perspectives, 15(4), 157-168.
• Engle, R.F. (2001). "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditinoal Heteroskedasticity Models," Journal of Business and Economic Statistics, 20, 339-350.
• Granger, C. and S.-H. Poon (2001). "Forecasting Financial Market Volatility," unpublished manuscript, Strathclyde University.
• Shephard, N. (1996) "Statistical Aspects of ARCH and Stochastic Volatility", in: D. R. Cox, D. V. Hinkley and O. E. Barndorff-Nielsen (eds), Time Series Models in Econometrics, Finance and Other Fields, London: Chapman & Hall.
• Silvennoinen, A., and Terasvirta, T. (2008). "Multivariate GARCH Models," Handbook of Financial Time Series.
• Shephard, N., and Andersen, T.G. (2008). "Stochastic Volatility: Origins and Overview," Handbook of Financial Time Series.
• Jungbacker, B., and Koopman, S.J. (2008). "Parameter Estimation and Practical Aspects of Modeling Stochastic Volatility," Handbook of Financial Time Series.
• Harvey, A.C., Ruiz, E., and Shephard, N. (1994). "Multivariate Stochastic Variance Models," Review of Economic Studies 61, 247-64.
• Chib, S., Omori, Y., and Asai, M. (2008). "Multivariate Stochastic Volatility," Handbook of Financial Time Series.
• Yu, J. (2005). "On Leverage in a Stochastic Volatility Model," Journal of Econometrics 127, 165-78.
• Kuester, K., Mittnick, S., and Paollela, M.S. (2006). "Value-at-Risk Prediction: A Comparison of Alternative Strategies," Journal of Financial Econometrics, 4(1), 53-89.

Extreme Value Theory and Copulas

• MFTS, Chapters 5 and 19
• Tsay, Chapter 7
• *FMUND, Chapters 6 and 7.

• Class slides for extreme value lectures (updated 5/3/2010). Powerpoint slides for extreme value lectures (updated 5/3/2010)

• Class slides for bivariate copulas (updated 5/12/2010). Powerpoint slides for copula lectures.

• McNeil, A. J., and R. Frey. (2000). "Estimation of Tail-related Risk Measures for Heteroscedastic Financial Time Series: An Extreme Value Approach." Journal of Empirical Finance 7:271�300.

• Brooks, C., A. D. Clare, J. W. Dalle Molle, and G. Persand. (2005). "A Comparison of Extreme Value Theory Approaches for Determining Value at Risk." Journal of Empirical Finance 12:339�352.

Textbook Readings

Additional Readings

• MFTS, Chapters  20, 22 and 23.
• Tsay, Chapter 6.
• *APDVP, Chapters 13 and 14.
• FMUND, Chapters 13-17.

• Class slides for continuous time models lectures (updated 5/19/2010).

 Ultra High Frequency Time Series

Textbook Readings

Additional Readings

• MFTS, Chapter 9.
• Tsay, Chapter 5.
• *APDVP, Chapter 12

• Class slides for introduction to high frequency data (updated 5/17/2010) . Powerpoint examples (updated 5/17/2010).

• Class slides for introduction to realized variance (updated 5/24/2010). Powerpoint examples (updated 5/24/2010)

• Class slides on estimating realized variance and covariance (updated 6/4/2010). Powerpoint examples (updated 6/4/2010)

• Short course on Analysis of High Frequency Financial Time Series presented at the 11th  Brazilian Time Series and Econometrics Meeting (ESTE), July 31 - August 3, 2005.

  lecture 1 (overview of high frequency data in finance)

  • notes

  • powerpoint slides

  lecture 2 (survey of realized variance)

  • notes

  • powerpoint slides (theory)

  • powerpoint slides (empirical results)

   

• Andersen, T., and Benzoni, L. (2008). "Realized Volatility," Handbook of Financial Time Series.

• Andersen, T., T. Bollerslev, F.X. Diebold, H. Ebens (2001). "The Distribution
  of Realized Stock Return Volatility," Journal of Financial Economics, 61, 43-76.

• Andersen, T., T. Bollerslev, F.X. Diebold, P. Labys (2001). The Distribution
  of Realized Exchange Rate Volatility, Journal of the American Statistical Association
  96, 42-55.

• Andersen, T., T. Bollerslev, F.X. Diebold, P. Labys (2003). �Modeling and
  Forecasting Realized Volatility,� Econometrica, 71(2), 579-626.

• Andersen, T., T. Bollerslev, F.X. Diebold, and C. Vega (2004). �Real-Time
  Price Discovery in Stock, Bond and Foreign Exchange Markets,� unpublished
  manuscript, Northwestern University, Duke University, University of Pennsylvania,
  and University of Rochester.

• Barndorff-Nielsen, O.E., and N. Shephard (2002a). "Estimating Quadratic
  Variation Using Realized Variance," Journal of Applied Econometrics, 17, 457-
  477.

• Barndorff-Nielsen, O.E., and N. Shephard (2002b). "Econometric Analysis of
  Realized Volatility and Its Use in Estimating Stochastic Volatility Models,"
  Journal of the Royal Statistical Society, Series B, 64, 253-280.

• Hansen, P.R. and A Lunde (2006). Realized Variance and Market Microstructure Noise (with discussion). Journal of Business and Economic Statistics, 24, 127-161.
• Ait-Sahalia, Y., and Mykland, P.A. (2008). "Estimating Volatility in the Presence of Market Microstructure Noise: A Review of the Theory and Practical Considerations."