Financial Innovation and Hedge Funds

Transcription

1 Financial Innovation and Hedge Funds Academic Year: 2017/2018 4th trimester Instructor(s): Joni Kokkonen Course Description: The course provides an overview hedge funds and structured products. The course is divided into two major parts. The first one deals with hedge funds, their typical trading strategies, risk and return, historical performance, and portfolio decisions involving hedge funds. The second part of the course covers the basics of structured products and securitization. The focus in this part will be on the role of structured products in the recent financial crisis. Case studies and exercises are used to apply these concepts and methods to practical problems. Course objectives and learning goals: After taking the course, the student should Understand the basics of hedge funds. How has the market evolved in time, what are the typical strategies used and how do they work? Be able to measure and understand the risk and return characteristics of hedge funds. Understand the role of hedge funds in well-functioning capital markets. Understand the basics of the process of securitization. Be able to analyze different structured products and understand how they work. Understand some of the mechanisms underlying the financial crisis and the role of structured products. Prerequisites: Financial Investments and Financial Derivatives

2 Bibliography: Textbooks: Lhabitant, F.-S., 2006, Handbook of Hedge Funds, Wiley Finance (selected chapters) Lecture slides Articles indicated in this syllabus and any additional material indicated during the course. Course Content: Preliminary structure of the course: PART I: Hedge Funds I. Overview of the course and introduction to hedge funds Course overview Institutional and regulatory framework (hedge funds vs. mutual funds) Evolution and current state of the hedge fund market Benefits and risks of hedge fund investing a. Book: Chapter 2 b. Stulz, R. (2007), Hedge funds: past, present, and future, Journal of Economic Perspectives, 21, c. Fung & Hsieh (1999), A primer on hedge funds, Journal of Empirical Finance, 6, d. Kokkonen, J. and Suominen, M. (2015), Hedge funds and stock market efficiency, Management Science II. Hedge fund strategies Long/short equity and equity market neutral Dedicated short Fixed income and credit arbitrage Merger arbitrage and convertible arbitrage Global macro High-frequency trading Other strategies

3 a. Book: Chapters 5-17 b. Hasbrouck, J. & Saar, G (2011), Low-latency trading, working paper c. Kirilenko, A., Kyle, A.S., Samadi, M. & Tuzun, T. (2011), The flash crash: The impact of high frequency trading on an electronic market, working paper III. Hedge fund risk, return, and performance Overview of the historical performance of different strategies and their risks Risk-adjusted performance Selection bias and survivorship bias a. Book: Chapters b. Asness, C., Krail, R. & Liew, J. (2001), Do hedge funds hedge?, Journal of Portfolio Management, 28, c. Malkiel, B. & Saha A. (2005), Hedge funds: risk and return, Financial Analysts Journal, 61, IV. Hedge funds and asset allocation Portfolio choice decisions involving hedge funds Diversification Limits of arbitrage a. Book: Chapters and 26 b. Agarwal, V. & Naik, N. (2004), Risk and portfolio decisions involving hedge funds, Review of Financial Studies, 17, c. Boyson, N.M., Stahel, C.W., & Stulz, R.M. (2010) Hedge fund contagion and liquidity shocks, Journal of Finance, 65, d. Mitchell, M., Pulvino, T. & Stafford, E. (2002), Limited arbitrage in equity markets, Journal of Finance, 57, e. Shleifer, R. & Vishny, R.W. (1997), The limits of arbitrage, Journal of Finance, 52, 35 55

4 PART II: Securitization, structured products, and the financial crisis V. Securitization Basics of the securitization process Overview of structured products a. Coval, J., Jurek, J. & Stafford, E. (2009), The economics of structured finance, Journal of Economic Perspectives, 23, b. Rajan, R.G. (2006), Has finance made the world riskier?, European Financial Management, 12, VI. Structured products and the financial crisis Overview of the causes of the financial crisis Role of financial innovation and structured products a. Brunnermeier, M. (2009) Deciphering the liquidity and credit crunch , Journal of Economic Perspectives, 23, b. Demyanyk, Y. & Van Hemert, O. (2011), Understanding the subprime mortgage crisis, Review of Financial Studies, 24, c. Spiegel, M. (2011), The academic analysis of the 2008 financial crisis: round 1, Review of Financial Studies, 24, d. Diamond, D.W. & Rajan, R. (2009), The credit crisis: Conjectures about causes and remedies, NBER working paper Grading: Group exercises (40%) Final exam (60%)

5 Contact(s) and Office hours: Office hours: by appointment Office: 5305 Code of conduct and ethics: Católica Lisbon School of Business and Economics is a community of individuals with diverse backgrounds and interests who share certain fundamental goals. A crucial element to achieve these goals is the creation and maintenance of an atmosphere contributing to learning and personal growth for everyone in the community. The success of CATÓLICA-LISBON in attaining its goals and in maintaining its reputation of academic excellence depends on the willingness of its members, both collectively and individually, to meet their responsibilities. Along with all the other members of our community, students are expected to follow professional standards and CATÓLICA-LISBON standards of Academic Integrity. Some details should be mentioned here: Please arrive on time for class with uninterrupted attendance for the duration of the class. Signing attendance sheet for anyone else in the class constitutes fraud and a violation of the CLSBE code of conduct. Use of computers and other electronic devices during the class is not allowed, unless expressly requested by the instructor of the course. Students who persistently act in a disruptive and disrespectful manner during the class session may be invited to leave. Students are expected to behave at all times according to the fundamental principles of academic integrity, including honesty, trust, fairness, respect, and responsibility. In particular, a) In individual graded assignments of any type, students may not collaborate with others or use any materials without explicit permission from the instructor of the course; b) In group assignments and reports, all students listed as authors shoud have performed a substantial amount of work for that assignment; c) It is dishonest to fabricate or falsify data in experiments, surveys, papers, reports or other circumstances; fabricate source material in a bibliography or works cited list; or provide false information in other documents in connection with academic efforts; d) Plagiarizing, i.e. to steal and pass off the ideas or words of another as one s own and or to use another s production without crediting the source (Merrian-Webster Dictionary) is an Academic Integrity breach. It can be avoided by using proper methods of documentation and acknowledgement. Visit this guide for additional resources on how to avoid plagiarism in your written submissions e) In exams students must not receive or provide any unauthorized assistance. During an examination, students may use only material and items authorized by the faculty. Use of smartwatches or other communication devices is not permitted during the exam.

6 Academic integrity breaches will be dealt with in accordance with the school s code of Academic Integrity: