This course is intended for PhD students in finance and related fields. It is designed to teach
students how to conduct empirical research in asset pricing. The goal is that students become
familiar with the issues at stake in empirical asset pricing, the methodologies used, the
classic papers as well as the recent
contributions, and be able to analyze and evaluate new research effectively. Finally, students are expected
to acquire the skills to conduct and present original empirical research in finance.
Material from two texbooks will be used thoughout the course:
[CLM} John Y. Campbell, Andrew W. Lo and A. Craig MacKinlay, The Econometrics of Financial Markets, Princeton University Press, 1997.
[AP} John Cochrane, Asset Pricing,
Princeton University
Press, 2001.
[S] Kenneth J. Singleton, Empirical Dynamic Asset Pricing: Model
Specification and Econometric Assessment, Princeton
University Press, 2006.
In addition to the textbooks we will also assign journal articles
(most downloadable from JSTOR and/or UNC e-journal links).
Prerequisites are: Econ 770, 771 and Busi 880. This means students must have basic knowledge of
financial economics and econometrics at the level of first year PhD courses. Knowledge of the material in Econ
871 (Time Series) is beneficial.
Campbell, J., 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., and R. Shiller, 1987, Cointegration and Tests
of Present Value Models, Journal of Political Economy 95, 1062-1087.
Students taking the course for credit
will be required to write reports and present papers, accounting for 60% of the grade
and take the final exam counting for the remaining 40%.
This is a very demanding course, irrespective of whether you are registered or just auditing.
The average student can expect to spend at least 20 hours per week outside of class with
assigned readings, reviewing lectures, etc.
The following papers will be covered in addition to the textbook material
Cochrane John, "Explaining the Variance of Price-Dividend Ratios". Review of Financial
Studies 5:2, (June 1992) 243-280.
Hodrick, R., 1992, Dividend Yields and Expected Stock Returns: Alternative Procedures for
Inference and Measurement, Review of Financial Studies 5, 357- 386.
Stambaugh, Robert F., 1999, \Predictive Regressions", Journal of Financial Economics, 54,
375{421.
Ang A. and Bekaert G. \Is Predictability there?", working paper, GSB, Columbia University.Fama, E., and K. French, 1988a, Permanent and Temporary Components of Stock Prices,
Journal of Political Economy, 96, 246-273.
Lustig Hanno and Stijn Van Nieuwerburgh. The Returns on Human Capital: Good Newson Wall Street is Bad News on Main Street. Working Paper, NYU and UCLA.
Lettau, M, and S. Ludvigson, 2001, Consumption, Aggregate Wealth, and Expected StockReturns, Journal of Finance 56, 815 - 850.
Lewellen, Jonathan W., 2004, Predicting Returns with Financial Ratios, Journal of Financial
Economics, 74 (2), 209-235.
Volatility Models
Bollerslev, T., 1986, Generalized Autoregressive Conditional Heteroscedasticity, Journal of
Econometrics 31, 307-327.
Bollerslev, T., R. Chou, and K. Kroner, 1992, ARCH Modeling in Finance: A Review of the
Theory and Empirical Evidence, Journal of Econometrics 52, 5-59.
Engle, R., 1982, Autoregressive Conditional Heteroskedasticity with Estimates of the Variance
of U.K. In0ation, Econometrica 50, 987-1008.
Engle, R., V. Ng, and M. Rothschild, 1990, Asset Pricing with a Factor- ARCH Covariance
Structure: Empirical Estimates for Treasury Bills, Journal of Econometrics 45, 213-237.
Nelson, D., 1991, Conditional Heteroskedasticity in Asset Returns: A New Approach,
Econometrica 59, 347-370.
Schwert, G.W., 1989, Why Does Stock Market Volatility Change Over Time?, Journal of
Finance 44, 1115-1153.
Required
Bollerslev, T., R. Engle, and J. Wooldridge, 1988, A Capital Asset Pricing Model with Time
Varying Covariance, Journal of Political Economy 96,116-131.
French, K., W. Schwert and R. Stambaugh, 1987, Expected Stock Returns and Volatility,
Journal of Financial Economics 19, 3-30.
Whitelaw, R., 1994, Time Variations and Covariations in the Expectation and Volatility of
Stock Market Returns, Journal of Finance 49, 515-541.
? Campbell J. and Hentchell L. 1992, No News is Good News: A Asymmetric changingVolatility in Stock Returns, Journal of Financial Economics 31, 281-318.
Harvey, C., 1989, Time Varying Conditional Covariance in Tests of Asset Pricing Models,
Journal of Financial Economics 24, 289-317.
? Jagannathan, R., and Z.Wang, 1996, The Conditional CAPM and the Cross-Section ofExpected Returns, Journal of Finance 51, 3-53.
3 Intertemporal Equilibrium Asset Pricing
3.1 Consumption-Based Asset Pricing { Representative Agent
Required
1. Abel, Andrew B., 1990, Asset prices under habit formation and catching up with the Joneses,
American Economic Review 80, 38{42.
2. Bansal, Ravi, and Amir Yaron, 2004, \Risk for the Long Run: A Potential Resolution of
Asset Pricing Puzzles," Journal of Finance, 59(4), 1481-1509,
3. Campbell, John Y., and John H. Cochrane, 1999, By Force of Habit: A Consumption-Based
Explanation of Aggregate Stock Market Behavior, Journal of Political Economy, 107, 205 -
251.
4. Constantinides, G., 1990, Habit Formation: A Resolution of the Equity Premium Puzzle,
Journal of Political Economy 98, 519 { 543.
5. Epstein, L., and S. Zin, 1989, Substitution, Risk Aversion, and the Temporal Behavior of
Consumption and Asset Returns: An Empirical Analysis, Journal of Political Economy 99,
263-286.
6. Hansen, L.P., and R. Jagannathan, 1991, Implications of Security Market Data for Models of
Dynamic Economies, Journal of Political Economy 99, 225 { 262.
7. Hansen, L.P., and K. Singleton, 1982, Generalized Instrumental Variables Estimation of
Nonlinear Rational Expectation Models, Econometrica 50, 1269 { 1286.
8. Lucas Robert Jr., 1978, "Asset Prices in an Exchange Economy", Econometrica, 46, 1429-
1446.
9. Mehra, R., and E. Prescott, 1985, The Equity Premium: A Puzzle, Journal of Monetary
Economics 15, 145 { 161.
Recommended
1. Abel, Andrew B., 1999, Risk premia and term premia in general equilibrium, Journal of
Monetary Economics 43, 3{33.
2. Campbell, John Y., 2002, Consumption-Based Asset Pricing, forthcoming, Handbook of the
Economics of Finance, Edited by George Constantinides, Milton Harris, and Rene Stulz,
North-Holland.
3. Bansal Ravi, Khatachtarian Varoujan, and Amir Yaron, "Interpretable Asset Markets?",
European Economic Review. 49, April 2005: 531-560.
4. Bansal, Ravi, and Wilbur J. Coleman II, 1997, A monetary explanation of the equity premium,
term premium and the risk-free rate puzzles, Journal of Political Economy, 104, 1135{1171.
5. Breeden, Douglas, Michael Gibbons, and Robert Litzenberger, 1989, Empirical Tests of the
Consumption Oriented CAPM, Journal of Finance, 44, 231 - 262.
6. Brown, D., and M. Gibbons, 1985, A Simple Econometric Approach for Utility-Based Asset
Pricing Models, Journal of Finance 40, 359 { 381.
7. Campbell, John Y., and John H. Cochrane, 2000, Explaining the Poor Performance of
Consumption-based Asset Pricing Models, Journal of Finance, LV (6), 2863 - 2878.
8. Campbell, J., 1993, Intertemporal Asset Pricing without Consumption Data, American
Economic Review 83, 487 { 512.
9. Campbell, Lo, and MacKinlay, 1997, Chapter 8.
10. Cecchetti, Stephen G., Pok-Sang Lam, and Nelson C. Mark, 1990, Mean reversion in
equilibrium asset prices, American Economic Review 80, 398{419
11. Cochrane, John H., and Lars P. Hansen, 1992, Asset Pricing Explorations for
Macroeconomics, NBER Macroeconomic Annual, 115 - 165.
12. Ferson, Wayne E., and George M. Constantinides, 1991, Habit Persistence and Durability in
Aggregate Consumption: Empirical Tests, Journal of Financial Economics, 29, 199 - 240.
13. Hansen, Lars Peter, and Kenneth J. Singleton, 1982, Generalized Instrumental Variables
Estimation of Nonlinear Rational Expectations Models, Econometrica, 50, 1269-1288.
14.
? Hansen Lars Peter, John Heaton, and Nan Li. Consumption Strikes Back?, Working Paper,University of Chicago.
15. Heaton, J., 1995, An Empirical Investigation of Asset Pricing with Temporally Dependent
Preference Specifications, Econometrica 63, 681 { 718.
16. Hansen, L.P., and R. Jagannathan, 1997, Assessing Specification Errors in Stochastic Discount
Factor Models, Journal of Finance 52, 557-590.
17. Hansen, L.P., and K. Singleton, 1983, Stochastic Consumption, Risk Aversion and the
Temporal Behavior of Asset Returns, Journal of Political Economy 91, 249 { 268.
18. Hansen, L.P., and K. Singleton, 1984, Errata, Econometrica 52, 267 { 268.
19. Kandel, Shmuel, and Robert F. Stambaugh, 1991, Asset returns and intertemporal
preferences, Journal of Monetary Economics 27, 39{71.
20. Weil, P., 1989 The Equity Premium Puzzle and the Risk-Free Rate Puzzle, Journal of
Monetary Economics 24, 401 { 421.
3.2 Financial Econometric Methods
Required
1. Gallant, R., and G. Tauchen, 1996, Which Moments to Match, Econometric Theory 12, 657{
681.
2. Hansen, L.P., 1982, Large Sample Properties of Generalized Method of Moments Estimators,
Econometrica 50, 1029{1054.
3. Lee, B., and B. Ingram, 1991, Simulation Estimation of Time-Series Models, Journal of
Econometrics 47, 197{205.
4. Ogaki, M., 1993, Generalized Method of Moments: Econometric Applications, in Handbook
of Statistics, Vol. 11.
5. Tauchen G. and R. Hussey, 1991, "Quadrature-Based Methods for Obtaining Approximate
Solutions to Nonlinear Asset Pricing Models," Econometrica, Volume 59, No. 2, pp. 371{396.
Recommended
1. Du1e, D., and K. Singleton, 1993, Simulated Moments Estimation of Markov Models of Asset
Prices, Econometrica 61:4, 929-952.
2. Gallant, R., and D. Nychka, 1987, Seminonparametric Maximum Likelihood Estimation,
Econometrica 55, 363-390.
3. Gallant, R., and G. Tauchen, 1989, Seminonparametric Estimation of Conditionally
Constrained Heterogeneous Processes: Asset Pricing Applications, Econometrica 57, 1091-
1120.
4. Hansen, Lars Peter, and James H. Heckman, 1996, The Empirical Foundations of Calibration,
Journal of Economic Perspective, 10 (1), 87 - 104.
5. Hansen, L.P., J. Heaton, and A. Yaron, 1996, Finite Sample Properties of Some Alternative
GMM Estimators, Journal of Business and Economic Statistics 14, 262 { 280.
3.3 Production Based Asset Pricing
Required
1. Cochrane, J., 1991, Production-Based Asset Pricing and the Link between Stock Returns and
Economic Fluctuations, Journal of Finance 46, 209-234.
2. Jermann, Urban J., 1998, Asset Pricing in Production Economies, Journal of Monetary
Economics, 41, 257 - 275.
Recommended
1. Boldrin, Michele, Larry Christiano, and Jonas Fisher, 2001, Habit Persistence, Asset Returns,
and the Business Cycle, American Economic Review, 91 (1), 149 - 166.
2. Chen, Nai-Fu, 1991, Financial Investment Opportunities and the Macroeconomy, Journal of
Finance, 46, 2, 529 - 554.
3. Fama, Eugene, F., 1990, Stock Returns, Expected Returns, and Real Activity, Journal of
Finance, 45, 1089 - 1108.
4. Gomes, Joao F., Amir Yaron, and Lu Zhang, 2002a, Asset Prices and Business Cycles with
Costly External Finance, Review of Economic Dynamics, Forthcoming.
5. Hall, Robert E., 2001, The Stock Market and Capital Accumulation, American Economic
Review, 91 (5), 1185 - 1202.
6. Lettau, Martin, and Sydney Ludvigson, 2002, Time-Varying Risk Premia and the Cost of
Capital: An Alternative Implication of the Q Theory of Investment, Journal of Monetary
Economics, 49, 31 - 66.
7.
? Lamont, Owen A., 2000, Investment Plans and Stock Returns, Journal of Finance, LV (6),2719 - 2745.
8.
? McGrattan, Ellen, and Edward C. Prescott, 2001b, Taxes, Regulations, and Asset Prices,NBER Working Paper, NO. w8623.
9. Rouwenhorst, G., 1995, Asset Pricing Implications of Equilibrium Business Cycle Models, in
Frontiers of Business Cycle Research, T. Cooley, Ed., Princeton University Press, Princeton,
NJ.
4 Heterogeneous Agents and Incomplete Markets
Required
1. Alvarez F. and U. Jermann, " Quantitative asset pricing implications of endogenous solvency
constraints." Review of Financial Studies 14 (November 2001): 1117 { 52.
2. Constantinides, G., and D. Du1e, 1996, Asset Pricing with Heterogenous Consumers, Journal
of Political Economy 104, 219-240.
3. Heaton J. and D. Lucas, 1996, "Evaluating the Effects of Incomplete Markets on Risk Sharing
and Asset Pricing," Journal of Political Economy, 104, 443-487.
4. Krusell P. and T. Smith, 1998, "Income andWealth Heterogeneity in Macroeconomy," Journal
of Political Economy, 106, 867-896.
5. Mankiw, Gregory N. 1986, The equity premium and the concentration of aggregate shocks.
Journal of Financial Economics 17, September, 211{219.
Recommended
1. Basak S. and D. Cuoco, 1998, "An Equilibrium Model with Restricted Stock Market
Participation." Review of Financial Studies 309-341.
2. Brav Alon; Constantinides M., George; and Chris, Christopher C. "Asset pricing with
heterogeneous consumers and limited participation: Empirical evidence." Journal of Political
Economy 110 (August 2002): 793{824.
3. Chan, Lewis, and Leonid Kogan, 2002, Catching Up with the Jones: Heterogeneous
Preferences and the Dynamics of Asset Prices, Journal of Political Economy, 110, 1255-1285
4.
? Constantinides G., Donaladson G. and R. Mehra, 2002, "Juniors Can't Borrow: A NewPerspective on the Equity Premium Puzzle", Quarterly Journal of Economics.
5. Den Haan, W.J., 2001, Understanding Equilibrium Models with a small and a Large Number
of Agents, Journal of Economic Dynamics and Control , 25(5), 721 { 746.
6. Den Haan, W.J., 1997, Solving Dynamic Models with Aggregate Shocks and Heterogeneous
Agents. Macroeconomic Dynamics , 1(2), 355 { 386.
7. Den Haan, W.J., 1996, Heterogeneity, aggregate uncertainty and the short term interest rate,
Journal of Business and Economic Statistics, , 14(4) 399 { 411.
8.
? Guvenen, Fatih, 2002, A Parsimonious Macroeconomic Model for Asset Pricing: HabitFormation or Cross-sectional Heterogeneity? Working Paper, University of Rochester.
9. Heaton J. and D. Lucas, 1992, "The Effects of Incomplete Insurance Markets and Trading
Costs in a Consumption-Based Asset Pricing Model" Journal of Economic Dynamics and
Control.16, 601-620
10. Huggett Mark, 1993, The Risk Free Rate in Heterogeneous-Agents, Incomplete Insurance
Economies, Journal of Economic Dynamics and Control, 17, 953-969.
11. Krusell, Per, and Smith, Anthony A. Income and wealth heterogeneity, portfolio choice, and
equilibrium asset returns." Macroeconomic Dynamics 1 (June 1997): 387-422.
12. Lucas, Deborah J. Asset pricing with undiversifiable risk and short sales constraints:
Deepening the equity premium puzzle, Journal of Monetary Economics 34 (December 1994):
325-41.
13.
? Lustig, Hanno. The market price of aggregate risk and the wealth distribution." Manuscript,Stanford University, 2001.
14.
? Lustig Hanno and Stijn Van Nieuwerburgh. 2005, Housing Collateral, Consumption Insuranceand Risk Premia: an Empirical Perspective, Journal of Finance, Vol. 60 (3), pp.1167-1219
15.
? Lustig Hanno and Stijn Van Nieuwerburgh. Quantitative Asset Pricing Implications ofHousing Collateral Constraint, Working Paper NYU and UCLA.
16. Telmer Chris, 1993, Asset Pricing Puzzles and Incomplete Markets, Journal of Finance, 48,
1803-1832.
17. Storesletten, Kjetil; Telmer, Chris I.; and Yaron, Amir, 2000, Asset pricing with idiosyncratic
risk and overlapping generations." Manuscript, Carnegie Mellon University,
18. Storesletten, Kjetil; Telmer, Chris I.; and Yaron, Amir. Consumption and risk sharing over
the life cycle," Journal of Monetary Economics, 2004, 51: 609-633.
19. Storesletten, Kjetil; Telmer, Chris I.; and Yaron, Amir. Cyclical Dynamics of Idiosyncratic
Labor Market Risk," Forthcoming Journal of Political Economy, 2004, 112:3 695-717.
20. Vissing-Jorgensen, Annette, 2002, Limited asset market participation and the elasticity of
intertemporal substitution, Journal of Political Economy 110, 825 { 853.
21. Zhang Harold, 1997, Endogenous Borrowing Constraints with Incomplete Markets, Journal of
Finance, 52(5), 2187 { 2209.
5 The Cross-Section of Returns
5.1 Cross-Sectional Expected Returns { ICAPM and Beta Method
Required
1. Bansal R. Dittmar R. and C. Lundblad "Consumption, Dividends, and the Cross-Section of
Equity Returns," Working Paper, Fuqua, Duke University.
2. Campbell, Lo, and MacKinlay, 1997, Chapter 5 and 6.
3. Fama, Eugene F., and Kenneth R. French, 1992, The Cross-Section of Expected Stock
Returns, Journal of Finance, 47, 427-465.
4. Fama, Eugene F., and Kenneth R. French, 1995, Size and Book-to-Market Factors in Earnings
and Returns, Journal of Finance, 50, 131-155.
5. Fama, Eugene F., and Kenneth R. French, 1996, Multifactor Explanations of Asset Pricing
Anomalies, Journal of Finance, 51, 55-84.
6. Gibbons, Michael R., Stephen A. Ross, and Jay Shanken, 1989, A Test of the E1ciency of a
Given Portfolio, Econometrica, 57, 1121-1152.
7. Jagannathan, Ravi, and Zhenyu Wang, 1996, The Conditional CAPM and the Cross-Section
of Expected Returns, Journal of Finance, 51, 3-54.
8. Lettau, Martin, and Sydney Ludvigson, 2001, Resurrecting the (C)CAPM: A Cross-Sectional
Test When Risk Premia Are Time-Varying, Journal of Political Economy, 109 (6), 1238-1287.
9. Menzly Lior, Tano Santos, Pietro Veronesi, 2004, The Time Series of the Cross Section of
Asset Prices(understanding predictability), Journal of Political Economy. 112:1, 1:47
Recommended
1. Ball, Ray, S.P. Kothari, and Jay Shanken, 1995, Problems in Measuring Portfolio
Performance: An Application to Contrarian Investment Strategies, Journal of Financial
Economics, (38), 79-107.
2. Bansal Ravi, Ed Fang, Amir Yaron, 2005, Equity Capital: A Puzzle?, Working Paper,
Wharton.
3.
? Berk, Jonathan, 1995, A Critique of Size-Related Anomalies, Review of Financial Studies,8, 275-286.
4. Berk, Jonnathan, 2000, Sorting out Sorts, Journal of Finance, 55 (1), 407-427.
5. Brennan, Michael, Tarun Chordia, and Avanidhar Subrahmanyam, 1998, Alternative Factor
Specifications, Security Characteristics, and the Cross-Section of Expected Stock Returns,
Journal of Financial Economics, 49, 345-373.
6. Brennan, Michael, Yihong Xia, and Ashley Wang, 2002, Intertemporal Capital Asset Pricing
and the Fama-French Three-Factor Model, Working Paper, UCLA.
7. Campbell, John Y., 1996, Understanding Risk and Return, Journal of Political Economy, 104,
298-345.
8.
? Campbell, John and Vuolteenaho, Tuomo, 2004, Bad Beta, Good Beta. American EconomicReview 94:1249-1275.
9. Cohen, Randolph B., Christopher Polk, and Tuomo Vuolteenaho, 2002, The Value Spread,
Forthcoming, Journal of Finance.
10. Chen, Nai-Fu, Richard Roll, and Stephen Ross, 1986, Economic Forces and the Stock Market,
Journal of Business, 59, 3, 383-403.
11.
? Daniel, Kent, and Sheridan Titman, 1997, Evidence on the Characteristics of Cross SectionalVariation in Stock Returns, Journal of Finance, 52(1), 1-33.
12. Davis, James L., Eugene F. Fama, and Kenneth R. French, 2000, Characteristics, Covariances,
and Average Returns: 1929-1997, Journal of Finance 55 (1), 389-406.
13. Fama, Eugene F., and Kenneth R. French, 1993, Common Risk Factors in the Returns on
Bonds and Stocks, Journal of Financial Economics, 33, 3-56.
14. Fama, Eugene F., and Kenneth R. French, 1999, Value Versus Growth: The International
Evidence, Journal of Finance, 53 (6), 1975-1999.
15. Kothari, S.P., Jay Shanken, and Richard Sloan, 1995, Another Look at the Cross-Section of
Expected Returns, Journal of Finance, 50, 185-224.
16. Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny, 1994, Contrarian Investment,
Extrapolation, and Risk, Journal of Finance, XLIX (5), 1541-1578.
17. LaPorta, Rafael, Josef Lakonishok, Andrei Shleifer, and Robert Vishny, 1997, Good News for
Value Stocks: Further Evidence on Market E1ciency, Journal of Finance, 52 (2), 859-874.
18.
? Jonathan Lewellen, and Stefan Nagel, The Conditional CAPM Does Not Explain AssetPricing Anomalies , Journal of Financial Economics, forthcoming.
19. Moskowitz Tobias, Chris Malloy, Annette Vising-Jorgensen, long run consumption risk of
stockholders, working paper, University of Chicago.
20. Liew, Jimmy, and Maria Vassalou, 2000, Can Book-to-Market, Size, and Momentum Be Risk
Factors That Predict Economic Growth? Journal of Financial Economics, 57, 221-245.
21. MacKinlay, A. Craig, 1995, Multifactor Models Do Not Explain Deviations From The CAPM,
Journal of Financial Economics, 38, 3-28.
22.
? Tano Santos, Pietro Veronesi, 2005 Cash Flow Risk, Discount Risk, and the Value Premium,working paper, University of Chicago.
23. Shanken, Jay, 1992, On the Estimation of Beta-Pricing Models, Review of Financial Studies,
5 (1). 1:33
24. Vuolteenaho, Tuomo, 2001, What Drives Firm-Level Stock Returns? Journal of Finance, 57
(1), 233-264.
5.2 Conditional Asset Pricing: SDF Method
Required
1. Bansal, Ravi and Viswanathan, S. (1993), No-arbitrage and and arbitrage pricing: A new
approach", Journal of Finance 48, 1231 { 1262.
2. Cochrane, John, 2001, Asset Pricing, Chapters 10-16.
3. Hansen, L.P., and S. Richard, 1987, The Role of Conditioning Information in Deducing
Testable Restrictions Implied by Dynamic Asset Pricing Models, Econometrica 55, 587 {
613.
4. Jagannathan, Ravi and ZhenyuWang, 1998, An asymptotic theory for estimating beta-pricing
models using cross-sectional regressions, Journal of Finance 53, 1285 { 1309.
5. Jagannathan, Ravi and Zhenyu Wang, 2002, Empirical evaluation of asset pricing models: A
comparison of the SDF and Beta methods, Journal of Finance 57, 2337 { 2367.
Recommended
1. Ball Ray, and S. P. Kothari, 1989, Nonstationary Expected Returns: Implications for Tests
of Market E1ciency and Serial Correlation in Returns, Journal of Financial Economics, 25,
51-74.
2. Chan, K. C., and Nai-Fu Chen, 1988, An Unconditional Asset-Pricing Test and the Role of
Firm Size as an Instrumental Variable for Risk, Journal of Finance, 43, 2, 309-325.
3. Chan, Louis K. C., and Nai-fu Chen, 1991, Structural and Return Characteristics of Small
and Large Firms, Journal of Finance, 46, 1467-1484.
4. Ferson, Wayne E., and Campbell R. Harvey, 1999, Conditioning Variables And Cross-Section
of Stock Returns, Journal of Finance, 54, 1325-1360.
5. Ferson, Wayne E., 2002, Tests of Multifactor Pricing Models, Volatility Bounds, and Portfolio
Performance, forthcoming, in Handbook of the Economics of Finance, Edited by George
Constantinides, Milton Harris, and Rene Stulz, North-Holland.
6. Ferson Wayne, and Campbell R. Harvey, 1991, The Variation of Economic Risk Premiums,
Journal of Political Economy, 99, 385-415.
7. Lewellen, Jonathan, 1999, The Time-Series Relations Among Expected Return, Risk, and
Book-to-Market, Journal of Financial Economics, 54, 5-43.
8. Shanken, Jay, 1990, Intertemporal Asset Pricing: An Empirical Investigation, Journal of
Econometrics, 45, 99-120.
5.3 Production Based
Required
1. Berk, Jonathan B, Richard C. Green and Vasant Naik, 1999, Optimal Investment, Growth
Options and Security Returns, Journal of Finance, 54, 1553 - 1607.
2. Cochrane, John H., 1996, A Cross-Sectional Test of an Investment-Based Asset Pricing Model,
Journal of Political Economy, 104 (3), 572 - 621.
Recommended
1.
? Dow, James, Gary Gorton, and Arvind Krishnamurthy, 2002, Corporate Finance andthe Term Structure of Interest Rates, Working Paper, Kellogg School of Management,
Northwestern University.
2.
? Gomes, Joao F., Leonid Kogan, and Lu Zhang, 2003, Equilibrium Cross-Section of Returns,Journal of Political Economy, 111:4, 693-732
3. Gomes, Joao F., Amir Yaron, and Lu Zhang, 2002b, Asset Pricing Implications of Firms
Financing Constraints, Working Paper, The Wharton School, University of Pennsylvania.
4.
? Johnson, Timothy, 2002, Rational Momentum Effect, Journal of Finance, LVII (2), 585-608.5. Leahy, John V., and Toni M. Whited, 1996, The Effect of Uncertainty on Investment: Some
Stylized Facts, Journal of Money, Credit, and Banking, 28 (1), 64-83.
6. Vassalou, Maria, and Yuhang Xing, 2002, Default Risk in Equity Returns, Working Paper,
Columbia Businss School.
7. Zhang, Lu, 2005, The Value Premium, Journal of Finance: LX:1 67-108
5.4 Learning in Capital Markets
Required
1. Brav, Alon, and J.B. Heaton, 2002, Competing Theories of Financial Anomalies, Review of
Financial Studies, 15 (2), 575-606.
2. Lewellen, Jonathan, and Jay Shanken, 2002, Learning, Asset-Pricing Tests, and Market
E1ciency, Journal of Finance, LVII (3), 1113-1145.
3. Pastor, Lubos, and Petro Veronesi, 2003, Learning About Profitability, Journal of Finance,
LVIII:4 1749-1789.
4. Pastor Lubos and Pietro Veronesi, 2005, Technological Revolutions and Stock Prices.
5. Timmermann, Allan, 1996, Excess volatility and predictability of stock returns in
autoregressive dividend models with learning, Review of Economic Studies 63, 523- 527.
Recommended
1. Brandt, Michael, Qi Zeng, and Lu Zhang, 2004, Equilibrium Stock Return Dynamics
Under Alternative Rules of Learning About Hidden State, Journal of Economic
Dynamics and Control, 28, 1925-1954
6 Fixed Income
6.1 Estimating and Testing Term Structure Models
Required
1. Backus D., and S. Foresi, and C. Telmer, 1999, Discrete Time Models of Bond Pricing, in N.
Jegadeesh and B. Tuckman, eds., Advanced Fixed-Income Valuation, Wiley and Sons.
2. Campbell, Lo, and MacKinlay, 1997, Chapters 10 an 11.
3. Cox, J., J. Ingersoll, and S. Ross, 1985, A Theory of the Term Structure of Interest Rate,
Econometrica 53, 385-407.
4. Dai Q. and K. Singleton, 2003, "Term Structure Modeling in Theory and Reality," Review
of Financial Studies . Vol. 16, 631-678.
5. Gibbons, M., and K. Ramaswamy, 1993, A Test of the Cox, Ingersoll, and Ross Model of the
Term Structure, Review of Financial Studies 6, 619-658.
6. Gray, S., 1996, Modeling the Conditional Distribution of Interest Rates as a Regime-Switching
Process, Journal of Financial Economics 42, 27-62.
7. Stambaugh, R., 1988, The Information in Forward Rates: Implications for Models of the
Term Structure, Journal of Financial Economics 21, 41-70.
8. Vasicek, O., 1977, An Equilibrium Characterization of the Term Structure, Journal of
Financial Economics 5, 177-188.
Recommended
1. Ang, Andrew, and Monika Piazzesi, 2003, A No-Arbitrage Vector Autoregression of Term
Structure Dynamics with Macroeconomic and Latent Variables, Journal of Monetary
Economics, 50(4), 745-787
2.
? Bansal, R. and H. Zhou (2002). Term Structure of Interest Rates with Regime Shifts.Journal of Finance 57, 1997-2043.
3. Bekaert, Geert, Robert J. Hodrick, and David A. Marshall, 1997, On Biases in Tests of
the Expectation Hypothesis of the Term Structure of Interest Rates, Journal of Financial
Economics, 44, 309-348.
4. Black, F., E. Derman, and W. Toy, 1990, A One-Factor Model of Interest Rates and its
Application to Treasury Bond Options, Financial Analysts Journal, January- February, 33-
39.
5. Brown, S., and P. Dybvig, 1986, The Empirical Implications of the Cox, Ingersoll, Ross
Theory of the Term Structure of Interest Rates, Journal of Finance 41, 617- 632.
6. Campbell, J., 1987, Stock Market and the Term Structure, Journal of Financial Economics
18, 373-399.
7. Campbell, John Y., and Robert J. Shiller, 1991, Yield Spreads and Interest Rates: A Birds
Eye View, Review of Economic Studies, 58, 495-514.
8. Chan, K., A. Karolyi, F. Longstaff, and A. Sanders, 1992, An Empirical Comparison of
Alternative Models of the Short-term Interest Rate, Journal of Finance 47, 1209-1228.
9.
? Cochrane, John, and Monika Piazzesi, 2004, Bond Risk Premia, forthcoming, AmericanEconomic Review.
10. Constantinides, G., 1992, A Theory of the Nominal Term Structure of Interest Rates, Review
of Financial Studies 5, 531-552.
11.
? Dai Q. and K. Singleton, 2000, "Analysis of A1ne Term Structure Models," Journal ofFinance, Vol. LV, 1943-1978.
12. Du1e, D., and R. Kan, 1996, A Yield-Factor Model of Interest Rates, Mathematical Finance
6, 379-406.
13. Fama, E., 1984, The Information in the Term Structure, Journal of Financial Economics 13,
509-528.
14. Fama, Eugene F., and Robert R. Bliss, 1987, The Information in Long-Maturity Forward
Rates, American Economic Review, 77, 680-692.
15.
? Heath, D., R. Jarrow, and A. Merton, 1992, Bond Pricing and the Term Structure of InterestRates: A New Methodology for Contigent Claims Valuation, Econometrica 60, 77-105.
16. Heath, D., R. Jarrow, and A. Merton, 1990, Bond Pricing and the Term Structure of Interest
Rates: A Discrete Time Approximation, Journal of Financial and Quantitative Analysis 25,
419-440.
17.
? Ho, T., and S. Lee, 1986, Term Structure Movements and Pricing Interest Rate ContingentClaims, Journal of Finance 41, 1011-1029.
18. Hull, J., and A. White, 1990, Pricing Interest-Rate-Derivative Securities, Review of Financial
Studies 3, 573-592.
19. Knez, P., R. Litterman, and J. Scheinkman, 1994, Explorations into Factors Explaining Money
Market Returns, Journal of Finance 49, 1861-1882.
20. Longstaff, F., and E. Schwartz, 1992, Interest Rate Volatility and the Term Structure: A
Two-Factor General Equilibrium Model, Journal of Finance 47, 1259- 1282.
21. Pearson, N., and T. Sun, 1994, Exploiting the Conditional Density in Estimating the Term
Structure: An Application to the Cox, Ingersoll and Ross Model, Journal of Finance 49,
1279-1304.
22. Piazzesi, M. (2001). An Econometric Model of the Term Structure with Macroeconomic Jump
Effects. Working Paper, UCLA.
23. Sun, T., 1992, Real and Nominal Interest Rates: A Discrete Time Model and Its Continuous
Time Limit, Review of Financial Studies 21, 41-70.
6.2 Estimating Continuous Time Processes
Required
1. Ait-Sahalia, Y., 1996c, Testing Continuous Time Models of the Spot Interest Rate, Review
of Financial Studies 9, 385-426.
2. Ait-Sahalia, Y., 2002, Maximum Likelihood Estimation of Discretely Sampled Diffusion: A
Closed Form Approach, Econometrica, 70: 1, 223-262.
3. Andersen, T., and J. Lund, 1997a, Estimating Continuous Time Stochastic Volatility Models
of the Short Term Interest Rate, Journal of Econometrics 77, 343-378.
4. Brandt, M., and P. Santa-Clara, 2002, Simulated Likelihood Estimation of Multivariate
Diffusion with an Application to the Exchange Rate Dynamics in Incomplete Markets,
Journal of Financial Economics, 63, 161-210
5. Chapman, D., and N. Pearson, 2000, Is the Short Rate Drift Actually Nonlinear? Journal of
Finance 55, 355-388.
6. Pritsker, M., 1998, Nonparametric Density Estimation and Tests of Continuous Time Interest
Rate Models, Review of Financial Studies 11, 449-487.
7. Stanton, R., 1997, A Nonparametric Model of Term Structure Dynamics and the Market
Price of Interest Rate Risk, Journal of Finance 52, 1973-2002.
Recommended
1. Ait-Sahalia, Y., 2002, Telling From Discrete Data Whether the Underlying Continuous-Time
Model is a Diffusion, Journal of Finance. 57(5), 2075-2112
2. Ait-Sahalia, Y., 1996, Nonparametric Pricing of Interest Rate Derivative Securities,
Econometrica 64, 527-560.
3. Conley, T., L.P. Hansen, E. Luttmer, and J. Scheinkman, 1997, Short-Term Interest Rates as
Subordinated Diffusions, Review of Financial Studies 10, 525-578.
4. Gallant, R., and G. Tauchen, 1998, Reprojecting Partially Observed Systems with Application
to Interest Rate Diffusions, Journal of the American Statistical Association 93, 10-24.
5. Gourieroux, C., A. Monfort, and E. Renault, 1993, Indirect Inference, Journal of Applied
Econometrics 8, S85-S118.
6. Hansen, L.P., and J. Scheinkman, 1995, Back to the Future: Generating Moment Implications
for Continuous Time Markov Processes, Econometrica 63, 767-804.
7. Hansen, L.P., J. Scheinkman, and N. Touzi, 1997, Spectral Methods for Identifying Scalar
Diffusions, Journal of Econometrics 86, 1-32.
8. Jiang, G., and J. Knight, 1997, A Nonparametric Approach to the Estimation of Diffusion
Processes, with an Application to a Short-Term Interest Rate Model, Econometric Theory
13, 615-645.
9. Lo, A., 1988, Maximum Likelihood Estimation of Generalized Ito Processes with Discretely
Sampled Data, Econometric Theory 4, 231-247.
10. Merton, R., 1980, On Estimating the Expected Return on the Market, Journal of Financial
Economics 8, 323-362.
11. Pedersen, A., 1995, A New Approach to Maximum Likelihood Estimation for Stochastic
Differential Equations Based on Discrete Observations, Scandinavian Journal of Statistics 22,
55-71.
7 Contingent Claims
7.1 Option Pricing Basics
Required
1. Black, F., and M. Scholes, 1973, The Valuation of Option and Corporate Liabilities, Journal
of Political Economy 81, 637-654.
2. Hull, J., and A. White, 1987, The Pricing of Options on Assets with Stochastic Volatilities,
Journal of Finance 42, 281-300.
3. Lo, A., and J. Wang, 1995, Implementing Option Pricing Models when Asset Returns are
Predictable, Journal of Finance 50, 87-129.
4. Cox, J., S. Ross, and M. Rubinstein, 1979, Option Pricing: A Simplified Approach, Journal
of Financial Economics 7, 229-263.
5. French, K., and R. Roll, 1986, Stock Return Variances: The Arrival of Information and the
Reaction of Traders, Journal of Financial Economics 17, 5-26.
6. Merton, R., 1976a, The Impact on Option Pricing of Specification Error in the Underlying
Stock Price Distribution, Journal of Finance 31, 333-350.
7. Merton, R., 1976b, Option Pricing When Underlying Stock Returns are Discontinuous,
Journal of Financial Economics 3, 125-144.
8. Whaley, R., 1982, Valuation of American Call Options on Dividend-Paying Stocks: Empirical
Tests, Journal of Financial Economics 10, 29-58.
9. Wiggins, J., 1987, Option Values Under Stochastic Volatility: Theory and Empirical
Estimates, Journal of Financial Economics 19, 351-372.
7.2 Testing Option Pricing Models
Required
1. Bakshi, G., C. Cao, and Z. Chen, 1997b, Empirical Performance of Alternative Option Pricing
Models, Journal of Finance 52, 2003-2049.
2. Bakshi, G., C. Cao, and Z. Chen, 2000, Do Call Prices and the Underlying Stock Always
Move in the Same Direction?, Review of Financial Studies 13, 549-584.
3. Burashi, A., and J. Jackwerth, 2001, The Price of a Smile: Hedging and Spanning in Option
Markets, Review of Financial Studies 14, 495-528.
4. Coval, J., and T. Shumway, 2001, Expected Option Returns, Journal of Finance 56, 983-1009.
5. Christensen, B., and N. Prabhala, 1998, The Relation between Implied and Realized Volatility,
Journal of Financial Economics 50, 125-50.
6. Rubinstein, M., 1985, Nonparametric Tests of Alternative Option Pricing Models Using All
Reported Trades and Quotes on the 30 Most Active CBOE Option Classes from August 23,
1976 Through August 31, 1978, Journal of Finance 40, 455-480.
Recommended
1. Bakshi, G., and Z. Chen, 1997a, An Alternative Valuation Model for Contingent Claims,
Journal of Financial Economics 44, 123-165.
2. MacBeth, J., and L. Merville, 1979, An Empirical Examination of the Black-Scholes Call
Option Pricing Model, Journal of Finance 34, 1173-1186.
7.3 Estimating Risk-Neutral Densities
Required
1. At-Sahalia, Y., and A. Lo, 1998, Nonparametric Estimation of State-Price Densities Implicit
in Financial Asset Prices, Journal of Finance 53, 499-548.
2. Dumas, B., J. Fleming, and R. Whaley, 1998, Implied Volatility Functions: Empirical Tests,
Journal of Finance 53, 2059-2106.
3. Jackwerth, J., and M. Rubinstein, 1996, Recovering Probability Distributions from
Contemporary Security Prices, Journal of Finance 51, 1611-1631.
Recommended
1. Ait-Sahalia, Y., and A.W. Lo, 2000, Nonparametric Risk Managament and Implied Risk
Aversion, Journal of Econometrics 94, 9-51.
2. Brandt, M., and T. Wu, 2002, Cross-Sectional Tests of Deterministic Volatility Functions,
Journal of Empirical finance. 9, 525-550
3. Derman, E., and I. Kani, 1994, Riding on the Smile, Risk 7, February 32-39.
4. Dupire, B., 1994, Pricing with a Smile, Risk 7,January 18-20.
5. Rubinstein, M., 1994, Implied Binomial Trees, Journal of Finance 49, 771-818.
7.4 Estimating Real and Risk-Neutral Stock Price Dynamics
Required
1. Chernov, M., and E. Ghysels, 2001, A Study Toward a Unified Approach to the Joint
Estimation of Objective and Risk Neutral Measures for the Purpose of Options Valuation,
Journal of Financial Economics 56, 407-458.
2. Pan, J., 2002, The Jump-Risk Premia Implicit in Options: Evidence from an Integrated
Time-Series Study, Journal of Financial Economics, 63, 3-50
Recommended
1. Chernov, M., R. Gallant, E. Gysels, and G. Tauchen, 1999, A New Class of Stochastic
Volatility Models with Jumps: Theory and Estimation, Working Paper, Columbia University.
2. Jones, C., 2003, The Dynamics of Stochastic Volatility, Journal of Econometrics, 116, 181-224.
