EMFI - Asset Pricing

EMFI - Asset Pricing - Finance Department Goethe University...

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Finance Department Goethe University Frankfurt Empirical Finance Winter Term 09/10 15.10.2009-12.2.2010 Dr. Christian Wilde 1
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Empirical Finance – Overview and tentative schedule A. Statistical Foundations of Asset Returns 22.10. Risk and Return 29.10. Statistical Methods B. Portfolio Selection Concepts 05.11. Empirical Aspects of Diversification 12.11. Black-Litterman Approach 19.11. Shortfall-Risk Concept C. Asset Pricing 26.11. Implementing Asset Pricing Models 03.12. Testing Asset Pricing Models 10.12. Predictability of Asset Returns D. Asset Management 17.12. Developing Investment Strategies 14.01. Performance Measurement E. Special Topics in Empirical Finance 21.01. Topic 1 28.01. Topic 2 Review Session: 04.02. WS 2009/10 Empirical Finance - Asset Pricing 2
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WS 2009/10 Empirical Finance - Asset Pricing B. Asset Pricing Overview of this section 1. One Factor Models (CAPM) 2. Implementing Asset Pricing Models 3. Testing Asset Pricing Models 4. Predictability of Asset Returns Main Literature: • Benninga, Simon (2008): Financial Modeling, 3rd edition, MIT Press. • Bodie, Z. / Kane, A. / Marcus, A. (2009): Investments, 8th edition, McGraw-Hill, 2009. • Elton, E. / Gruber, M. / Brown, S. / Goetzmann, W. (2003): Modern Portfolio Theory and Investment Analysis, 6th Ed., Wiley, Chapters 4-6, 13-16. Additional Literature: • Roll, R. (1977): A Critique of the Asset Pricing Theory‘s Tests - Part I: On past and potential testability of the theory. Journal of Financial Economics 4, 129-176 (Appendix: Efficient Set Mathematics, 158-175). 3
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Empirical Finance - Asset Pricing 4 Asset Pricing Models: Factor models One-factor models Capital Asset Pricing Model (CAPM) and Market model Multi-factor models Fundamental factors: Company characteristics and market data (P/B, P/E, industry, momentum, trading activity, etc. (Model example: Fama-French, Carhart, BARRA, Vestek) Macro economic factors: interest rates, inflation, exchange rates, industrial production etc. (Model example: BIRR Model) Statistical factors: obtained from historical time series and cross sectional stock return data through principal component analysis or factor analyses (Model example: APT) WS 2009/10
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Empirical Finance - Asset Pricing 5 Factor models: Examples E(R i ) – r f = β i [E(R m ) – r f ] β i,F1 [E(R F1 ) – r f ] + β i,F2 [E(R F2 ) – r f ] +…. + β i,FK-1 [E(R FK-1 ) – r f ]+ β i,FK [E(R FK ) – r f ] β i,m [E(R m ) – r f ] + β i,SMB E[SMB] + β i,HML E[HML]+ β i,Mom E[Momentum] WS 2009/10
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Empirical Finance - Asset Pricing 6 CAPM: Theory and Extensions Assumptions of the CAPM (Capital Asset Pricing Modell) Perfect capital market: 1. No transaction costs 2. Infinite divisibility of assets 3. No taxes 4. No restrictions regarding investments and short sales 5. All assets are traded on capital markets (e.g. human capital) Investors: 6. Investments decisions depend (only) on μ and σ 7. All investotrs have homogenous expectations (same vector of expected returns and same covariance matrix) 8. Competition, i.e. there is no large investor that moves prices WS 2009/10
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Empirical Finance - Asset Pricing 7 Intuition (1) If the portfolios of all market participants are completely diversified, the
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EMFI - Asset Pricing - Finance Department Goethe University...

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