empirical financial economics l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Empirical Financial Economics PowerPoint Presentation
Download Presentation
Empirical Financial Economics

Loading in 2 Seconds...

play fullscreen
1 / 28

Empirical Financial Economics - PowerPoint PPT Presentation


  • 179 Views
  • Uploaded on

Empirical Financial Economics. The Efficient Markets Hypothesis Review of Empirical Financial Economics. Stephen Brown NYU Stern School of Business UNSW PhD Seminar, June 19-21 2006. Major developments over last 35 years. Portfolio theory. Major developments over last 35 years.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Empirical Financial Economics' - babu


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
empirical financial economics

Empirical Financial Economics

The Efficient Markets Hypothesis

Review of Empirical Financial Economics

Stephen Brown NYU Stern School of Business

UNSW PhD Seminar, June 19-21 2006

major developments over last 35 years3
Major developments over last 35 years
  • Portfolio theory
  • Asset pricing theory
major developments over last 35 years4
Major developments over last 35 years
  • Portfolio theory
  • Asset pricing theory
  • Efficient Markets Hypothesis
major developments over last 35 years5
Major developments over last 35 years
  • Portfolio theory
  • Asset pricing theory
  • Efficient Markets Hypothesis
  • Corporate finance
major developments over last 35 years6
Major developments over last 35 years
  • Portfolio theory
  • Asset pricing theory
  • Efficient Markets Hypothesis
  • Corporate finance
  • Derivative Securities, Fixed Income Analysis
major developments over last 35 years7
Major developments over last 35 years
  • Portfolio theory
  • Asset pricing theory
  • Efficient Markets Hypothesis
  • Corporate finance
  • Derivative Securities, Fixed Income Analysis
  • Market Microstructure
major developments over last 35 years8
Major developments over last 35 years
  • Portfolio theory
  • Asset pricing theory
  • Efficient Markets Hypothesis
  • Corporate finance
  • Derivative Securities, Fixed Income Analysis
  • Market Microstructure
  • Behavioral Finance
efficient markets hypothesis
Efficient Markets Hypothesis

which implies the testable hypothesis ...

where is part of the agent’s information set

In returns:

where

examples
Examples
  • Random walk model
        • Assumes information set is constant
  • Event studies
        • For event dummy (event)
  • Time variant risk premia models
        • zt includesX
  • Important role of conditioning information
efficient markets hypothesis11
Efficient Markets Hypothesis
  • Tests of Efficient Markets Hypothesis
    • What is information?
    • Does the market efficiently process information?
  • Estimation of parameters
    • What determines the cross section of expected returns?
    • Does the market efficiently price risk?
efficient markets hypothesis12
Efficient Markets Hypothesis
  • Weak form tests of Efficient Markets Hypothesis
    • Example: trading rule tests
  • Semi-strong form tests of EMH
    • Example: Event studies
  • Strong form tests of EMH
    • Example: Insider trading studies (careful about conditioning!)
trading rules cowles 1933
Trading Rules: Cowles 1933
  • Cowles, A., 1933 Can stock market forecasters forecast? Econometrica 1 309-325
  • William Peter Hamilton’s Track Record 1902-1929
    • Classify editorials as Sell, Hold or Buy
  • Novel bootstrap in strategy space

Return on DJI

asset pricing models gmm paradigm
Asset pricing models: GMM paradigm
  • Match moment conditions with sample moments
  • Test model by examining extent to which data matches moments
  • Estimate parameters
example time varying risk premia
Example: Time varying risk premia

Time varying risk premia

imply a predictable component of excess returns

where the asset pricing model imposes constraint

estimating asset pricing models gmm
Estimating asset pricing models: GMM
  • Define residuals
  • Residuals should not be predictable using instruments zt-1 that include the predetermined variables Xt-1
  • Choose parameters to minimize residual predictability
estimating asset pricing models maximum likelihood
Estimating asset pricing models: Maximum likelihood
  • Define residuals
  • Choose parameters to minimize
    • Establishes a connection to Fama and MacBeth
    • Resolves the “measurement error problem”
  • Relationship to GMM: when instruments zt include the predetermined variables Xt
estimating asset pricing models a simpler way
Estimating asset pricing models: A simpler way
  • Time varying risks and time varying premia:
  • This collapses to a simpler model
  • which generalizes:
      • Investment management style analysis (GSC)
      • Performance benchmark issues
      • “Pure play” definitions
conclusion
Conclusion
  • Efficient Market Hypothesis is alive and well
  • EMH central to recent developments in empirical Finance
  • EMH highlights importance of appropriate conditioning
      • in empirical financial research
      • in practical applications