Asset Pricing: General Issues & Instructions - Jan-Feb 2023

Asset Pricing General Issues & Instructions Jan-Feb 2023 D.Sc. (Econ.) Elias Oikarinen Professor (Associate) of Economics University of Oulu, Oulu Business School (Many thanks to D.Sc. Heikki Lehkonen and D.Sc. Asif Ruman for helping with the learning material) Course Aim and Learning Outcomes The...

Asset Pricing General Issues & Instructions Jan-Feb 2023 D.Sc. (Econ.) Elias Oikarinen Professor (Associate) of Economics University of Oulu, Oulu Business School (Many thanks to D.Sc. Heikki Lehkonen and D.Sc. Asif Ruman for helping with the learning material) Course Aim and Learning Outcomes The main aim is to provide students with understanding of key theoretical and empirical issues concerning asset pricing, especially regarding publicly traded stocks. Upon completion of the course, the student understands: - the foundations of asset pricing theory - the most important asset pricing models - the basics of empirical tests of asset pricing models - the stylized facts about stock returns. 2 Course Aim and Learning Outcomes The course provides students with understanding and experience that enables / helps with e.g. • Master’s thesis work on topics related to asset pricing and returns • Reading and summarizing/reviewing & presenting contents of scientific articles • Independently deepening one’s understanding and finding further information on topics related to asset pricing • Acquiring deeper understanding in Doctoral level asset pricing courses • Working in the financial industry 3 Course Aim and Learning Outcomes One key aim of studying and pondering the different asset pricing models and approaches is to enhance the understanding of the basic logic behinds asset prices, especially in the publicly traded stock market. This helps e.g. in conducting informed and enlightened trading and other decision making in the market. 4 Contents • Recap of basic issues such as return computations • Utility theory and risk aversion • Capital asset pricing model (CAPM) and its drawbacks • Arbitrage pricing theory (APT) & multi-factor models • Regression-based tests of linear factor models • Consumption based CAPM (CCAPM) & stochastic discount factor • Intertemporal CAPM (ICAPM) • Cross-section of stock returns • Anomalies & behavioral issues • Market efficiency & time-series predictability of stock returns • That is: some repetition from previous courses, but going deeper into the models / theories Asset Pricing is a vast area, and it is impossible to cover all related topics within one course. (POLL) 5 General on the Course (6 credits) • Learning activities and teaching methods: • 36 hours of lectures, of which 12 hours allocated for assigned group presentations by students • Independent studying and completing learning diary & assignment + a final e-exam, altogether 124 hours • Students write learning diaries and engage in a group project in which they present assigned topic • Reading scholarly journal articles is an essential part of the course • Target group: Students of the Master’s program in Finance • Prerequisites and co-requisites: Fundamentals of Finance (Principles of Econometrics and also Mathematical Economics are recommended) • During the course, it is assumed that you have the prior understanding provided in the above mentioned courses 6 Learning Material • Lecture handouts • Based largely on Bodie et al. (2014 & 2021) and Cuthbertson & Nitzsche (2004, Quantitative Financial Economics) • NOTE: the handouts only provide the core structure for lectures – students are expected to independently make additional notes • Textbooks • Additional material that is provided in Moodle during the course (scientific articles, in particular) • Presentation material regarding group projects 7 Textbooks • • Valuable and important help in the learning process Relevant parts from: • Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10th global edition, McGraw-Hill. (https://oula.finna.fi/Record/oy.9912380733906252 ) • A Generally oriented book on investments and asset pricing, not very formally (mathematically) oriented and is thus easily accessible • Chapters 1-3 as a recap + 5-13, 18 • Cochrane, J.H. 2005. Asset Pricing (Revised Edition). (https://oula.finna.fi/Record/oy.998758573906252 ) • More formally oriented book with emphasis on the stochastic discount factor approach to asset pricing • Main textbook in numerous Doctoral level asset pricing courses • For us, the main parts regarding CCAPM, in particular • An excellent book for an analytically minded student who wishes to deepen understanding on asset pricing 8 Assessment Methods and Criteria • Passing the course requires writing learning diaries and conducting a group project in an acceptable manner; Also a final e-exam has to be accomplished • A student has to accomplish all the 4-5 diaries and the group project in order to pass the course • These all need to be done, and relevant files submitted in Moodle, before each deadline • The final evaluation (i.e. course grade) will be based on the group project, learning diaries, and on the final exam • 60% group presentation, 40% e-exam (+ learning diaries can give extra points or minus points hence potentially increasing or decreasing the overall grade) • Evaluation/grading: 0-5 • As usual, it requires substantial effort to get a good grade 9 Lectures Mondays, Tuesdays and Fridays Aimed to last app. 90 minutes (although the presented schedule reserves 105 min) Schedule and contents are provided in Moodle. One has to attend minimum 4 out of 5/6 last lectures. Otherwise lectures are not compulsory. Any changes to the timetable will be informed via Moodle (so all registered students will get that information). Polls are conducted via Zoom, link is provided in Moodle. Lecture handouts will be available in Moodle latest in the morning before each lecture. 10 Lectures For a successful accomplishment of the course, participation in the lectures is recommended 1) The lectures and textbooks are only partly overlapping, i.e. they also are complementary. 2) The lecture handouts only provide the core structure based on which lectures are "built", i.e., the they do not cover all details and issues discussed in the lectures. 3) The lectures concentrate on explaining key issues from the point of view of the learning aims of the course. 4) Attendance in lectures should help with the writing of learning diaries. 11 Learning Diaries / Assignments • 4-5 learning diaries, all of which need to be completed in order to pass the course • These actually are not “pure” learning diaries, but rather a mixture of diaries and assignments • No long texts, but rather summarizing key issues by bullet point style • Aim is to learn by pondering afterwards the topics discussed during lectures, and by reading articles and relating those to the discussed topics • Are done individually: In order to learn and feel good about your understanding and course accomplishments, read the articles and complete the diaries by yourself. Naturally, you can ask some help from your peers, if there are issues that you have not fully understood. In 2021 & 2022, students felt that these assignments were very interesting and helpful in terms of the learning process! 12 Learning Diaries / Assignments • Remember the deadlines (given in Moodle) to submit in corresponding submission folder in Moodle • More information is provided in Moodle for each diary separately • I will provide brief overall feedback (on the issues related to the assigned article, in particular) • Attendance in lectures should help, but one can write a diary (based on lecture handouts + other assigned material) regarding a given topic even if one is not able to participate the lecture(s) 13 Learning Diaries / Assignments • Diaries will affect your final grade: • For a very good diary, I will give a + mark; For a relatively poor (but still satisfactory) diary, I will give a – mark; Most diaries will likely get neither (unless there are numerous very good ones or poor ones) • The plusses and minuses are then netted for each student, and even a one (net) + can increase the final grade, or one (net) – can lower it*; value of one + is 0.25 in the final grade For instance, if the overall grade for group project and exam is 3.3, +0.25 will raise your grade to 4 • 14 Group Project • Lectures and learning diaries (inc. reading corresponding assigned articles and parts of textbooks) provide the core understanding, and the group projects concentrate on more specific asset pricing issues • Each group is assigned with a specific topic together with some readings (mainly scientific articles, but can also include book chapters) based on which they give a presentation • Presentations: app. 25-30 minutes per group; during the last 2 weeks of the course • Evaluation of the project is based on the presentation – all group members will get the same evaluation, unless there are strong reason to do otherwise 15 Group Project • Peer learning & teaching: The presentations should be aimed at teaching the other students the key elements of the assigned topic and articles • Peers (i.e. other students) give a brief feedback on they feeling about how well the group managened to teach the topic • Also, I will give a short feedback • Presentation slides are to be submitted into a project submission folder prior to the presentation • More instructions will be provided in Moodle 16 Group Project: Groups • Groups of 4 students (initial idea – this will depend on the number of students in the course) • You can form groups by yourselves – please email me info on the members of your group by Sun 22 Jan (any help that I could provide with group formation?) • After 22 Jan, I will allocate the groups for those students that do not belong to any group by that date • You can work together face-to-face or via Zoom, for instance • Do not allow freeriding: Work together as a group and help each other learn – everyone should work as an equal member of the group (please let me know if you feel that you are not allowed to contribute or someone is freeriding in your group) 17 Group Project: Topics • Lectures will cover only the most important asset pricing theories and concentrate typically to the most fundamental parts • Group presentations provide deeper and wider understanding on selected topics • These will also help you to familiarize yourselves with the academic research on asset pricing, and finance in general • List of topics will be included in Moodle soon • You can reserve a topic by sending me an email (I will immediately mark a topic as reserved in Moodle, after noticing such an email) • I will assign topics to those groups that have not selected a one by Wed 25 Jan 18 Important! • Remember to allocate enough time for the completion of diaries and the group project! • A typical mistake that can be avoided: starting with a task too late  not being able to accomplish the task properly 19 Asset Pricing: On contents https://www.youtube.com/watch?v=7-Ml9sEE9F0&list=PLpccx1MwQZb7t7HJ6lBo4L3DXhknCD0K7&index=10 • Rational asset pricing • Efficient market hypothesis • Asset prices reflect arbitrage-free prices • Risk related theories • Equilibrium asset pricing models • Behavioral asset pricing • Explanations for anomalies • Mispricing • Behavioral biases • Theoretical and empirical asset pricing • We mostly concentrate on (publicly traded) stock markets; However, similar analysis can often be applied to other financial markets and sometimes even to other (non-financial) cash-generating assets (such real estate) 20 On Scientific Articles & Reading and Presenting them (POLL) 21 Basis of a Good Research Paper Writing a good research paper (and getting it published in a good journal) can be done in several ways; The most common are: • • Purely theoretical article on new topic or extension to some old idea • A new research method (typically econometric procedure) for an old topic that manages to handle some previous problems • A unique data that permits you to increase the reliability of results compared with earlier studies on the topic or to study some topic that has not been properly studied before • New research setting/idea • A very well written and structured survey of existing research on a given topic (several like this to be read during the course) 22 Basis of a Good Research Paper The most common are (cont’d) • • Common data but a new perspective to some topic • Common data but some special feature of some market (for instance influence of an institutional change, (in)efficiency of a particular market) • The most challenging and hence valuable approach: new theoretical framework and testing it with data • Or observations from the data -> theoretical explanations • It would be recommended that the research articles are directed from research ideas to data • However, quite often the direction is from data to research ideas 23 Basis of a Good Research Paper • No matter how good, reliable and unique the data and the perspectives are, the research article needs a good story! • All the best research papers have a solid story • Some claim that the authors are trying to justify their results • When you are reading the articles for the assignments, find the story that the authors are trying to tell • Whether you believe it or not, depends on you and on how well the authors are doing their part 24 Reading & Reporting Try to find the key points of each article • • Find the reason why authors are doing their study: Motivation • • Those should be available in the abstract and in the introduction (also in concluding section) Once you understand these, it will be easier to go through the details • Theory • Empirical methods & Data • Results • Practical implications • Remaining / arising questions 25 Reading & Reporting Regarding learning diaries, you should • • Consider all the issues mentioned in the corresponding instructions • Summarize briefly by bullet points showing that you have understood the key issues Regarding group project & presentation, you should • • Consider all the issues mentioned in the instructions • Be able to explain the key issues to other students • NOTE: • Do not worry if you do not understand all the maths or econometric methods! • Most important is to get the motivation, key ideas, basics of the research setting, and key results & their implications 26