2. The Efficient Markets Hypothesis - Generalized Method of Moments

Transcription

1 Useful textbooks for the course are SYLLABUS UNSW PhD Seminar Empirical Financial Economics June 19-21, 2006 J. Cochrane, (JC) 2001, Asset Pricing (Princeton University Press, Princeton NJ J. Campbell, A. Lo and A.C. MacKinlay (CLM), 1997, The Econometrics of Financial Markets (Princeton University Press, Princeton NJ). June The Efficient Markets Hypothesis - Review of Empirical Financial Economics The purpose of this class is to identify the Efficient Market Hypothesis as a central paradigm of empirical finance. The relationship between this concept and related Random Walk Hypothesis. Introduce the importance of sample design, and how sample selection bias can lead to false inferences in empirical study of the EMH. CLM Chapters 1,2 Fama 1976 Chapters 1, 5 Cowles 1933 Fama 1965 Brown, Goetzmann and Ross The Efficient Markets Hypothesis - Generalized Method of Moments We discuss recent advances in the empirical analysis of the Random Walk Hypothesis. Show that these variance ratio tests are essentially tests of the overidentification restrictions implied by this hypothesis, and use this observation to provide a simple introduction and motivation for Hansen's Generalized Method of Moments. JC Chapter 10,11 Hansen & Singleton 1982, 1983 Lo & MacKinlay 1988 Richardson & Smith

2 June Semistrong tests -- Event Studies Show how GMM in the context of semistrong tests of the EMH relates to the Event Study paradigm. Analysis of the Event Study paradigm in the context of the classic paper by Fama Fisher Jensen and Roll. Are event studies applied data analysis or studies of information equilibria? We discuss the empirical issues of event studies. Identify the central role of interpretation in the context of event studies; the choice of statistical methodology is of a second order of importance. Emphasize the central importance of Acharya and Prabhala contribution in casting event studies into a more general information economics perspective and providing a practical resolution of the endemic sample selection bias issue. CLM Chapter 4 Acharya 1988 Ball & Brown 1968 Brown & Warner 1980, 1985 Fama et al 1969 Ohlson & Patell 1979 Prabhala Asset Pricing and Mean Variance Efficiency The empirical implications of multiperiod equilibrium asset pricing models. Consumption based asset pricing models. Important moment restrictions that arise from this analysis. Relationship to EMH paradigm and tests of mean variance efficiency. JC Chapters 1-6 CLM Chapter 6,8 Hansen & Jagannathan 1991 Gibbons et al., 1989 June Current Approaches to Performance Measurement The purpose of performance measurement systems is to measure the extent to which portfolio managers add value by virtue of their access to information superior to that available to the average market participant. We discuss the relevance of different proposed measures of investment performance relative to this criterion, and practical implementation issues. There is an interesting 2

3 relationship between performance measurement metrics and the determination of appropriate style benchmarks. Brown & Goetzmann, 1997, 2003 Brown et al 2005 Chen & Knez, 1996 Goetzmann et al 2004 Ferson & Schadt, 1996 Jensen, 1968 Sharpe, William F, 1966, 1992 see also readings found at 6. Ex-post conditioning issues A careful analysis of the ex-post conditioning issues that arise in performance measurement and other contexts of empirical finance. Brown, Goetzmann and Ross 1995 Brown, Goetzmann, Ibbotson and Ross 1992 Elton, Gruber, Das and Hlavka

4 REFERENCES Acharya, S., 1988, A generalized econometric model and tests of a signalling hypothesis with two discrete signals Journal of Finance 43(2), Ball, R. and P. Brown, 1968 An empirical evaluation of accounting income numbers Journal of Accounting Research 6, Brown, S. and J. Warner, 1980 Measuring security price performance Journal of Financial Economics 8, Brown, S. and J. Warner, 1985 Using daily stock returns: The case of event studies Journal of Financial Economics 14, 3-31 Brown, S., W. Goetzmann, R. Ibbotson and S. Ross, 1992, Survivorship Bias in Performance Studies Review of Financial Studies 5, Brown, S., W. Goetzmann and S. Ross, 1995, Survival Journal of Finance 50, Brown, Stephen J. and William N. Goetzmann, 1997 Mutual Fund Styles. Journal of Financial Economics 43:3, Brown, Stephen J. and William N. Goetzmann, 2003 Hedge Funds with Style. Journal of Portfolio Management Journal of Portfolio Management 29, Winter Brown, Stephen J., Gallagher, David R., Steenbeek, Onno W. and Swan, Peter Lawrence, "Double or Nothing: Patterns of Equity Fund Holdings and Transactions" (February 2, 2005). Chen, Z. and P. Knez, 1996 Portfolio performance measurement: Theory and evidence. Review of Financial Studies 9, Cowles, A., 1933 Can stock market forecasters forecast? Econometrica Elton, E., M. Gruber, S. Das and M. Hlavka, 1993, Efficiency with costly information: A reinterpretation of evidence from managed portfolios Review of Financial Studies 6, 1-22 Fama, E., 1976 Foundations of Finance (Basic Books, New York) Fama, E., et al.,1969 The adjustment of stock prices to new information International Economic Review 10, Fama, E., 1965 The behavior of stock market prices Journal of Business 38,

5 Ferson, Wayne E. and Rudi W. Schadt, 1996 Measuring Fund Strategy And Performance In Changing Economic Conditions. Journal of Finance 51:2, Gibbons, M, S. Ross and J. Shanken, 1989 A test of the efficiency of a given portfolio Econometrica 57, Goetzmann, William N., Ingersoll Jr., Jonathan E., Spiegel, Matthew I. and Welch, Ivo, "Portfolio Performance Manipulation and Manipulation-Proof Performance Measures" (November 2004). Yale ICF Working Paper No Available at SSRN: Hansen, L.P. and K.J. Singleton, 1982b, Generalized instrumental variables estimation of nonlinear rational expectations models Econometrica 50(5), Hansen, L. and R. Jagannathan, 1991, Implications of security market data for models of dynamic economies Journal of Political Economy 99, Hansen, L.P. and K. Singleton, 1983, Stochastic consumption, risk aversion, and the temporal behavior of asset returns Journal of Political Economy 91(2), Hansen, L.P. and K.J. Singleton, 1982, Large sample properties of generalized method of moments estimators Econometrica 50(4), Jensen, Michael, 1968 The performance of mutual funds in the period Journal of Finance 23(2), Lo, A. and A.C. MacKinley, 1988, Stock market prices do not follow random walks: Evidence from a simple specification test Review of Financial Studies 1(1), Ohlson, J. and J. Patell, 1979 Residual (API) analysis and the private value of information Journal of Accounting Research 17, Prabhala, N., 1997 Conditional Methods In Event-Studies And An Equilibrium Justification For Using Standard Event-Study Methods, Review of Financial Studies 10, Richardson, M. and T. Smith, 1991, Tests of financial models in the presence of overlapping observations, Review of Financial Studies 4, Sharpe, William F, 1966 Mutual fund performance. Journal of Business 39(1), Sharpe, William F, 1992 Asset allocation: management style and performance measurement. Journal of Portfolio Management 18:1,