Syllabus:  Financial Econometrics – Preliminary

NHH
PhD course
Fall 2021

Professor Bernt Arne Ĝdegaard (BAĜ), NHH and UiS. (bernt.a.odegaard@uis.no)
Professor Eric de Bodt (EdB), NHH and University of Lille. (eric.debodt@nhh.edu)

Overview

This course is a first course in empirical finance at the PhD level. The course attempts to lay the groundwork for students who will later do empirical research work. It is therefore a hands on course where the students will have to perform analysis on actual data, and where the examples are chosen to illustrate the typical questions asked in finance research.

In the analysis of data we will use the typical computer tools for doing such analysis. For any nontrivial empirical analysis we have to use other tools than Excel and similar spreadsheets. Any empirical researcher have to be familiar with a range of computer tools, and choose the right tool for a given estimation problem. The typical tools are a general tool for numerical linear algebra, such as Matlab, and a more dedicated statistics package. We will in the course use the statistics packages R and Stata for most of the analysis.

Delivery

Bernt Arne Ĝdegaard’s sessions will be delivered as physical lectures in four two-day sessions during the fall. Eric de Bondt’s sessions will be delived as weekly video lectures and zoom discussions, with a video lecture posted on monday, starting in october.

The current plan is as follows:

Physical lecture meetings (BAĜ)

Session 1 (BAĜ) Sep 9/10
Session 2 (BAĜ) Sep 26/27
Session 3 (BAĜ) Oct 21/22
Session 4 (BAĜ) Nov 18/19

Video Schedule (EdB)

Week 40: 4 oct video lecture, 8 oct zoom discussion
Week 41: 11 oct video lecture, 15 oct zoom discussion
Week 42: 25 oct video lecture, 29 oct zoom discussion
Week 44: 1 nov video lecture, 5 nov zoom discussion
Week 45: 8 nov video lecture, 12 nov zoom discussion
Week 47: 22 nov video lecture, 26 nov zoom discussion
Week 48: 29 nov video lecture, 3 dec zoom discussion

As always these days, things may change depending on the Covid-19 situation.

For up-to-date information, and lecture notes, look at the

Course Homepage

https://ba-odegaard.no/teach/empir_finance_2021/index.html

Course Contents

Evaluation

Course evaluation will be based on student handins to empirical problems. In the problems you are typically given a dataset which you need to analyze, and write up your analysis.

You need to do the exercises as you would write the results in an academic paper: Tables summarizing results, detailed descriptions of what is estimated in the table, and a text discussion of what the results mean. In an appendix you should provide the exact estimation in the form of Matlab/R/Stata code and output.

Computer Tools

To do empirics one will need to improve the nerd gene a bit. The first challenge for the students in this course is therefore make sure you have available the typical tools. Stata, the statistics program, should be available on the schools computers. R, a public domain package for doing statistics, is generally installed at most universities. Since it is an open source package, it can be installed on any computer. It is available at www.r-project.org. You will also need a matrix handler. Here there are a number of alternatives available. Matlab is the alternative for people with no money troubles, it is a commercial program used in the industry. A number of open alternatives to Matlab can be used. One is octave, available at www.octave.org. Another is scilab, available at www.scilab.org. However, these two programs are being replaced by Julia, a more powerful tool. For the types of examples we do in this course, the syntax of Julia is very similar to Matlab and Octave. Julia is also open soource and can be installed anywhere.

Datasets

In the course we will be looking at various examples. A number of typical finance datasets will be referred to. These datasets will both be used in examples in class that you should try to replicate, and in the exercises you should turn in.

Textbooks

There is no single textbook for this course. Campbell (2018), Cochrane (2005) and Ferson (2019) are used as references, and are high-level summaries of both theoretical and empirical asset pricing. Another, although now slightly dated book, is Campbell, Lo, and MacKinlay (1997), which contains a lot of useful information about the classical tests.

Most of the lectures will be accompanied by detailed lecture notes on the course homepage, together with slides etc. Those lecture notes will be relatively self-contained and complete.

In this course we will refer to various econometric, mathematical and computing topics that may or may not be known to you from before. If these are completely new areas for you, you may want some guidance and references. I’m listing a reference or two to various textbook sources I find useful.

These books are available from amazon and similar online retailers.

Detailed overview of the course

Detailed teaching overview, grouped by teacher._______________________________________

Taught by Bernt Arne Ĝdegaard

Taught by Eric de Bondt:_____________________________________________________________

An Introduction to Econometric Programming using Stata

Lecture 1 : Anatomy of a research project in Stata

 Writing Stata code  Stata coding guidelines  Optimization:  Compiled commands   Implicit loops  Structuring Stata code for research projects  Data management   Descriptive statistics  Models estimation  Tables/figures generation  The first seven : cls/clear/pause on/set more off/set linesize/cd/version  Structuring the code: program/args  My best friends: display/pause/log/timer/trace

Assignment : Restructuring an existing code

Lecture 2: The Building Blocks

 directories: cd/pwd  data types: byte/int/long/float/double/str/strL  missing data: missing() / mvencode + mvdecode  handling errors: capture / r()  controlling the display: quietly  local / global macro (literal, expression, nested, evaluation, ++)   macro extended functions  scalars/matrices  namespaces  command classes: r_class/e_class/c_class/s_class  stored results  return/ereturn  preserve/restore   implicit loops: by & statsby prefix, _n & _N constants  explicit loops: foreach/for values   Loops on macros, variables, etc  Loops on observations (x[i])

Assignment: Testing multiple model specifications

Lecture 3 : More Building Blocks

 varlist (wildcards * and -) / numlist  creating & updating variables: generate / replace / egen / egenmore  selecting observations  keep / drop  if/in/cond()/inlist()/inrange()   data conversion functions and commands:  real()/string()/recode()/autocode()/egen cut()/egen group()  tostring/destring/recode/encode/decode/recode  factor variables / leads and lags (calendar dates) versus x[_n-1]  managing dates  Date data types  Date formats : %td/%tc/…  From date literal to date value : td()/tw()/…  Date conversion functions: date()/mdy()/…  memory management: compress/memory/task manager

Assignment: Computing Hoberg and Phillips 10 nearest neighbors average similarity score

Lecture 4 : Data management  importing data: infile/insheet/import excel   augmenting data: append/merge  restructuring dta:  reshape  fillin/cross/joinby   xpose / stack / separate  testing: assert/duplicates/isid/unique/codebook

Assignment : Importing SDC data and merging with CRSP/Compustat data

Lecture 5 : More on programming

 Tables: estimates/esttab/estadd/tabout  Figures:  Graph types  Essential twoway options  Stata matrix : svmat/mkmat/matrix list & operators  postfile  frame

Assignment: Bootstrapping two stage estimators

Lecture 6 : Panel data and diff-in-diff estimators

 Panel data management  xtset  xtdescribe  xtsum / xttab  xtdata  xtline   Panel data regression  xtreg / areg  reghdfe  xtivreg

Assignment: Trade flows and cross-border M&A activity – testing for a causal relation

Lecture 7 : From regression to Lasso and Elastic Nets – a first step towards machine learning

 Stepwise regression  Lasso for prediction on model selection

Assignment: Agnostic fundamental analysis works, Bartram and Grinblatt (2018)

References

   Joseph Adler. R in a nutshell. O’Reilly, 2010.

   Joshua D Angrist and Jörn-Steffen Pischke. Mostly Harmless Econometrics. Princeton University Press, 2008.

   Söhnke M. Bartram and Mark Grinblatt. Agnostic fundamental analysis works. Journal of Financial Economics, 128(1):125–147, 2018. ISSN 0304-405X. doi: https://doi.org/10.1016/j.jfineco.2016.11.008. URL https://www.sciencedirect.com/science/article/pii/S0304405X1730315X.

   Fisher Black, Michael Jensen, and Myron Scholes. The capital asset pricing model, some empirical tests. In Michael C Jensen, editor, Studies in the theory of capital markets. Preager, 1972.

   John Y Campbell. Financial Decisions and Markets. A Course in Asset Pricing. Princeton University Press, 2018.

   John Y Campbell, Andrew W Lo, and A Craig MacKinlay. The econometrics of financial markets. Princeton University Press, 1997.

   Pierre Chaussé. Computing generalized method of moments and generalized empirical likelihood with r. Journal of Statistical Software, 34(11):1–35, 2010.

   John Cochrane. Asset Pricing. Princeton University Press, revised edition, 2005.

   Eugene F Fama and J MacBeth. Risk, return and equilibrium, empirical tests. Journal of Political Economy, 81:607–636, 1973.

   Wayne Ferson. Empirical Asset Pricing. Models and Methods. MIT Press, 2019.

   William H Greene. Econometric Analysis. Pearson, eight edition, 2018.

   Jesper Schmidt Hansen. GNU Octave, Beginner’s Guide. PACKT Publishing, 2011.

   Ravi Jagannathan, Georgios Skoulakis, and Zhenyu Wang. Generalized method of moments: Applications in finance. Journal of Business & Economic Statistics, 20(4), October 2002.

   A Craig MacKinlay. Event studies in economics and finance. Journal of Economic Literature, XXXV: 13–39, March 1997.

   A Craig MacKinlay and Matthew P Richardson. Using generalized method of moments to test mean-variance efficiency. Journal of Finance, 46:511–27, 1991.

   R David Mclean and Jeffrey Pontiff. Does academic research destroy stock return predictability? Journal of Finance, LXXI(1):5–30, 2016.

   James H Stock and Mark W Watson. Introduction to Econometrics. Pearson, 4th edition, 2019.