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MSc.

Finance/CLEFIN
2013/2014 Edition

Financial Econometrics and Empirical Finance II


Professor Massimo Guidolin (with Prof. Carlo Favero)

COURSE OUTLINE/OBJECTIVES
The course introduces the student to modern techniques in the area of financial (empirical)
econometrics; in particular, the interaction between theory and empirical analysis is
emphasised. The course also focused on the main econometric ingredients for portfolio
allocation: forecasting the distribution of returns.
Because of the applied emphasis, specific lab classes will illustrate how MATLAB programmes
are constructed to practically implement the tools discussed in the lectures. The course
takes as a prerequisite the introduction to MATLAB offered in the first semester within the
MATLAB project at the Department of Finance (see the section Resources on the Dept. of
Finance website for more details). Draft MATLAB codes for the solution of exercises will be
made available in advance on the course webpage, students are expected to work on them
and refine their understanding of such codes during the laboratory sessions and in class.
A prerequisite is Financial Econometrics and Empirical Finance I (20191). Keep in mind that
a Statistics Prep course has been offered between the end of August and mid-September
2013 and that the material covered in those 20 hours represent essential background, see
http://didattica.unibocconi.eu/mypage/map.php?IdUte=135242&idr=14063&lingua=eng
http://didattica.unibocconi.eu/mypage/doc.php?idDoc=15646&IdUte=48622&idr=7083&Tipo
=m&lingua=eng

ASSESSMENT METHODS (THE EXAM)


There will be one midterm/intermediate test (on April 9, 2014) and one final, partial exam.
Each of the two tests will carry a weight of 50%. A student can access the final exam starting
from the midterm grade only if the midterm grade is 18 or higher.
The formats of the midterm and final exams are the same: exams are open book, open
notes. Questions will cover three different but highly interrelated topics: the econometric
methods; the Matlab codes and coding structures introduced during the course; the data
used and the exercises performed on these data during the lab sessions. The exam is not
computer based, although there might be questions on MATLAB programming

TEXTBOOKS AND OTHER SUPPORT MATERIALS


The material covered in the course is outlined in lecture notes made available via the class
website, at
http://didattica.unibocconi.eu/mypage/map.php?IdUte=135242&idr=14063&lingua=eng

Lecture notes and class presentations of the material should be taken as a guidance for
further study on the two textbook:
Brooks C. (2002) Introductory Econometrics for Finance, Cambridge University Press
(chapters 1-9, henceforth Brooks)
Christoffersen P. F. (2012) Elements of Financial Risk Management, Academic Press 2nd
edition (chapters 1-10, henceforth Christoffersen)
For each topic we will also provide suggestions for further reading, whose consultation is
left to the students initiative.
To run the Matlab codes you need to download Lesage Spatial Econometrics. Here is a useful
link: http://www.spatial-econometrics.com/ Additional packages to be downloaded and
installed to correctly run the Matlab codes assigned/developed during the classes will be
indicated during the lab sessions.

DETAILED SYLLABUS (required readings are indicated by a *; all lectures will be conveyed
by Prof. Guidolin, apart from where a different indication is provided)

1. The Econometrics of Financial Returns: an Introduction


*Lecture Notes.
*CHRISTOFFERSEN, chapter 1.
BROOKS, chapters 1-2.
Cochrane, J. (1999) New Facts in Finance Federal Reserve Bank of Chicago, Economic
Perspectives, Quarter 3.
2. An Introduction to Univariate Time Series Analysis: conditional and unconditional
densities, stationarity, ARMA processes
*Lecture Notes.
*BROOKS, chapter 5.
*CHRISTOFFERSEN, chapter 3.
3. Estimation of ARMA models; forecasting with ARMA models; practical examples
in MATLAB [note: lecture by C. Favero].
*Lecture Notes.
*BROOKS, chapter 5.
*CHRISTOFFERSEN, chapter 3.
4. The econometrics of predictability and the Dynamic Dividend Growth Model
[note: lecture by C. Favero].
*Lecture Notes.
Boudoukh, J., M., Richardson, and R., Whitelaw (2008), The Myth of Long-Horizon
Predictability, Review of Financial Studies, 21, 1577-1605.
Campbell, J. Y., and R., Shiller (1988) Stock Prices, Earnings, and Expected Dividends,
Journal of Finance, 43, 661-676.
Campbell, J. Y., and R., Shiller (1988) The Dividend-Price Ratio and Expectations of future
Dividends and Discount Factors, Review of Financial Studies, 1, 195-228.
Campbell, J. Y., and R., Shiller (1998) Valuation Ratios and The Long-Run Stock Market
Outlook, Journal of Portfolio Management, Winter, 11-28.
Campbell, J. Y., and S., Thomson (2005) Predicting Excess Stock Returns Out of Sample:
Can Anything Beat the Historical Average?, NBER Working Paper 11468 (appeared in Review
of Financial Studies in 2008).
Cochrane J. (2006) The dog that did Not Bark: a Defense of Return Predictability, NBER
Working Paper 12026 (appeared in Review of Financial Studies in 2008).

Lettau, M., and S., Van Nieuwerburgh (2008), Reconciling the Return Predictability
Evidence, Review of Financial Studies, 21,1607-1652.
Valkanov, R. (2003) Long-Horizon Regressions: Theoretical Results and Applications,
Journal of Financial Economics, 68, 201-232.
Welch, I., and A., Goyal, (2008) A Comprehensive Look at the Empirical Performance of
Equity Premium Prediction, Review of Financial Studies, 21, 1455-1508.

5. Asset Allocation with simple and sophisticated models; going to the data: asset
allocation in practice [note: lecture by C. Favero].
*Lecture Notes.
6. An Introduction to Multivariate Time Series Analysis.
*Lecture Notes.
*BROOKS, chapter 6.
*CHRISTOFFERSEN, chapter 3.
7. Cointegration and error correction models.
*Lecture Notes.
*BROOKS, chapter 7.
Campbell, J. Y. and R. Shiller (1987) "Cointegration and Present Value Models", Journal of
Political Economy, 95, 1062-1088.
Lettau, M., and S., Ludvigson (2005) Expected Returns and Expected Dividend Growth,
Journal of Financial Economics, 76, 583-626.
8. Univariate Volatility Modeling: ARCH and GARCH.
*Lecture Notes.
*CHRISTOFFERSEN, chapter 4.
*ANDERSEN T., BOLLERSLEV T., CHRISTOFFERSEN P., DIEBOLD, F. (2006) Volatility and
Correlation Forecasting, in Elliott G., Granger C., and Timmermann A. (eds.), Handbook of
Economic Forecasting, Elsevier.
Engle, R. F. (2001) GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics,
Journal of Economic Perspectives, 15, 157-168.
Hansen P.R., and A., Lunde (2005) A Forecast Comparison of Volatility Models: Does
Anything Beat a GARCH(1,1)? Journal of Applied Econometrics, 20, 873889.
9. Non-Normal Distributions and their Uses in GARCH Modeling [M. Guidolin].
*Lecture Notes.
*CHRISTOFFERSEN, chapter 6.
BROOKS, chapter 8.
Jaschke, S. (2002), The Cornish-Fisher-Expansion in the Context of Delta-Gamma-Normal
Approximations, Journal of Risk, Number 4, Summer 2002.
Tersvirta T. (2009) An Introduction to Univariate GARCH Models, in Andersen, T., Davis,
R., Krei, J.-P., and Mikosch, T., Handbook of Financial Time Series, Springer.
10. Brief Overview of Realized Volatility and Covariances [M. Guidolin].
*Lecture Notes.
*CHRISTOFFERSEN, chapter 5.
BROOKS, chapter 8.

Andersen T. and Benzoni L. (2009) Realized Volatility, in Andersen, T., Davis, R., Krei,
J.-P., and Mikosch, T., Handbook of Financial Time Series, Springer.
McAleer, M., and M., Medeiros (2008), Realized Volatility: A Review, Econometric
Reviews, 27, 1045.

11. Markov and Regime Switching Models.


*Lecture Notes.
*GUIDOLIN M. (2012) Markov Switching Models in Empirical Finance, in Advances in
Econometrics (D. Drukker et al., editors), Emerald Publishers Ltd.
*HAMILTON, J. (2005) Regime Switching Models, in New Palgrave Dictionary of Economics.
BROOKS, chapter 9.
Derman, E. (1999) Regimes of Volatility Some Observations on the Variation of S&P 500
Implied Volatilities, Goldman Sachs Quantitative Strategies Research Notes.
Guidolin M., and A., Timmermann (2006) An Econometric Model of Nonlinear Dynamics in
the Joint Distribution of Stock and Bond Returns, Journal of Applied Econometrics, 21, 1-22.
Guidolin M., S., Hyde, D., MacMillan, and S., Ono, S. (2009) Non-Linear Predictability in
Stock and Bond Returns: When and Where Is It Exploitable?, International Journal of
Forecasting, 2009, 25, 373-399.
Guidolin, M., and F., Ria (2011), Regime Shifts in Mean-Variance Efficient Frontiers: Some
International Evidence, Journal of Asset Management, 12, 322-349.
Lange T. and A., Rabhek (2009) An Introduction to Regime Switching Models, in Andersen,
T., Davis, R., Krei, J.-P., and Mikosch, T., Handbook of Financial Time Series, Springer.
Turner, C., R., Startz, and C., Nelson (1989) A Markov Model of Heteroskedasticity, Risk
and Learning in the Stock Market, Journal of Financial Economics, 25, 3-22.
12. Multivariate Volatility and Correlation Modeling.
*Lecture Notes.
*CHRISTOFFERSEN, chapters 7-9.
*SILVENNOINEN,A., and T., TERSVIRTA (2009) Multivariate GARCH Models, in Andersen,
T., Davis, R., Krei, J.-P., and Mikosch, T., Handbook of Financial Time Series, Springer.
Andersen T., T., Bollerslev T., and F., Diebold F. (2009) Parametric and Nonparametric
Volatility Measurement, in in Ait-Sahalia, Y., and Hansen, L., P., (eds.), Handbook of
Financial Econometrics, Elsevier.
Bauwens, L., S., Laurent, and J. Rombouts (2006) Multivariate GARCH Models: A Survey,
Journal of Applied Econometrics, 21, 79-109, 2006.
Litterman R., and K., Winkelmann (1998). Estimating Covariance Matrices, Goldman Sachs
Quantitative Strategies Research Notes.
Patton A., and K., Sheppard (2009) Evaluating Volatility and Correlation Forecasts, in
Andersen, Davis, Krei, and Mikosch, Handbook of Financial Time Series, Springer.
13. Overview of Simulation-Based Methods.
*CHRISTOFFERSEN, chapter 2.
Barone-Adesi, G., K., Giannopoulos, and L., Vosper (1999) VaR without Correlations for
Nonlinear Portfolios, Journal of Futures Markets, 19, 583-602.
Christoffersen, P., F. Diebold, and T., Schuermann (1998) Horizon Problems and Extreme
Events in Financial Risk Management, Federal Reserve Bank of New York Federal Reserve,
Economic Policy Review, 109-118.

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