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ECON 4858-001 Financial Econometrics

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ECON 4858-001 Financial Econometrics
University of Colorado - Department of Economics - Fall 2013
ECON 4858 Financial Econometrics
Professor Carlos Martins-Filho
Office. Economics Building 105.
Meetings. Tuesdays and Theursdays 9:30 AM - 10:45 AM in GUGG 205.
Office hours. Tuesdays 3:30 PM - 5:30 PM and by appointment. For appointment send an email to [email protected]
Prerequisites. Successful completion of ECON 3818 or equivalent is a required pre-requisite. ECON 4818
is desirable but by no means necessary.
Objectives. Introduce statistical models, estimation and testing procedures used in analyzing financial data.
Class URL. http://spot.colorado.edu/∼martinsc/ECON 4858.html.
Grades. Grades (A-F) will be based on the following:
• There will be five sets of homework questions whose answers will be graded. Each set accounts for 8
percent of your course grade. Some of these questions will involve the use of MATLAB, a software
that is freely available on campus.
• There will be one midterm examination. It accounts for 30 percent of your course grade.
• There will be a final examination. It accounts for 30 percent of your course grade.
Dates for the examinations:
Examination
Midterm
Final Examination
Date and Time
October 17, in class
December 16, 1:30 PM - 4:00 PM
Homework sets will be available on the class web site with their respective due dates.
Textbook.
1. Ruppert, D., 2004, Statistics and Finance: An Introduction. Springer, New York.
Additional.
1. Bernstein, P., 2005, Capital Ideas: The Improbable Origins of Modern Wall Street. John Wiley and
Sons, New York.
This book gives an informal and historical account of the development of many of the models we treat
in class. Great reading for all students in this course.
2. Lai, T. L., and Peng, H., 2008, Statistical Models and Methods fo Financial Markets. Springer, New
York.
3. Ruppert, D., 2011, Statistics and Data Analysis for Financial Engineering. Springer, New York.
These books contain much of the material in our textbook. In many instances, however, the treatment
is more advanced.
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4. Campbell, J., Lo, A., and MacKinlay, A. C., 1997, The Econometrics of Financial Markets. Princeton
University Press, Princeton, New Jersey.
This is an advanced textbook, normally used in graduate courses. Its study is recommended for those
that have taken more advanced courses in probability, statistics and econometrics and are looking for
a deeper understanding of what we discuss in class.
5. Hanselman, D. and Littlefield, B., 2005, Mastering MATLAB 7. Pearson, Upper Saddle River, New
Jersey.
This is one of many step-by-step manuals/guide to MATLAB that are commercially available. It is
very easy to read and provides speedy access to the many resources this software offers.
Topics.
All readings are from the textbook and class notes.
1. Introduction and Basic Concepts for Probability and Statistical Models
Random variables
Distribution functions, Cumulative distribution functions
Quantiles Moments Order statistics
Skewness, kurtosis and heavy tail distributions
Multivariate distributions, marginals and conditional distributions
Prediction Estimation - maximum likelihood, least squares
Hypothesis testing and confidence intervals
2. Returns
The random walk model
The efficient market hypothesis
3. Time Series Models
Stationarity
Autoregressive AR(p) models and estimation
Moving average models MA(q) and estimation ARMA/ARIMA models
Model selection: Akaike’s information criterion (AIC) and Bayesian information criterion (BIC)
Forecasting
4. Portfolio theory
Trading off expected return and risk
5. Regression
Least squares estimation
Regression and best linear prediction
Non-normality and data transformations
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6. The capital asset pricing model
Capital market line, security market line
Security characteristic line
Using CAPM in portfolio analysis
Factor models
7. Fixed income securities
Zero-coupon bonds, coupon bonds
Yield to maturity
Term structure
Continuous compounding
Continuous forward rates
Sensitivity of price to yield
8. GARCH Models
9. Value-at-Risk
One asset
Portfolio
10. Options pricing
Call options
The law of one price
Pricing calls
Martingales
The Black-Scholes model, formula and its use
Puts
Evolution of option prices
Leverage of options and hedging
Important information.
• If you qualify for accommodations because of a disability, please submit a letter from Disability Services
in a timely manner (for exam accommodations provide your letter at least one week prior to the
exam) so that your needs can be addressed. Disability Services determines accommodations based on
documented disabilities. Contact Disability Services at 303-492-8671 or by e-mail [email protected]
If you have a temporary medical condition or injury, see Temporary Medical Conditions: Injuries,
Surgeries, and Illnesses guidelines under Quick Links at Disability Services website and discuss your
needs with me.
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• Campus policy regarding religious observances requires that faculty make every effort to reasonably
and fairly deal with all students who, because of religious obligations, have conflicts with scheduled
exams, assignments or required attendance. In this class, if the midterm, final or homework due dates
prevent/inhibit you from exercising your rights to religious observance, please inform me by August
28, 2012 so that reasonable accommodations can be made. See full details at
www.colorado.edu/policies/fac relig.html.
• Students and faculty each have responsibility for maintaining an appropriate learning environment.
Those who fail to adhere to such behavioral standards may be subject to discipline. Professional
courtesy and sensitivity are especially important with respect to individuals and topics dealing with
differences of race, color, culture, religion, creed, politics, veteran’s status, sexual orientation, gender,
gender identity and gender expression, age, disability, and nationalities. Class rosters are provided to
the instructor with the student’s legal name. I will gladly honor your request to address you by an alternate name or gender pronoun. Please advise me of this preference early in the semester so that I may
make appropriate changes to my records. See polices at www.colorado.edu/policies/classbehavior.html.
and at www.colorado.edu/studentaffairs/judicialaffairs/code.html#student code.
• All students of the University of Colorado at Boulder are responsible for knowing and adhering to
the academic integrity policy of this institution. Violations of this policy may include: cheating,
plagiarism, aid of academic dishonesty, fabrication, lying, bribery, and threatening behavior. All
incidents of academic misconduct shall be reported to the Honor Code Council ([email protected];
303-725-2273). Students who are found to be in violation of the academic integrity policy will be subject
to both academic sanctions from the faculty member and non-academic sanctions (including but not
limited to university probation, suspension, or expulsion). Other information on the Honor Code can
be found at www.colorado.edu/policies/honor.html and at www.colorado.edu/academics/honorcode/.
• The University of Colorado Policy on Sexual Harassment applies to all students, staff and faculty.
Sexual harassment is unwelcome sexual attention. It can involve intimidation, threats, coercion, or
promises or create an environment that is hostile or offensive. Harassment may occur between members
of the same or opposite gender and between any combinations of members in the campus community:
students, faculty, staff, and administrators. Harassment can occur anywhere on campus, including
the classroom, the workplace, or a residence hall. Any student, staff or faculty member who believes
s/he has been sexually harassed should contact the Office of Discrimination and Harassment (ODH)
at 303-492-2127 or the Office of Judicial Affairs at 303-492-5550. Information about the ODH and the
campus resources available to assist individuals who believe they have been sexually harassed can be
obtained at www.colorado.edu/odh/.
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