The class provides students with a deeper understanding of the valuation of financial assets. The first part of the lecture explains the fundamental pricing equation and its intuition. We start with the CAPM as the most famous factor model and discuss tests based on time-series and cross-sectional regressions as well as tests based on portfolio sorts. Motivated by the empirical failure of the CAPM, we study the three-factor model of Fama and French and further extensions as e.g. the Momentum Factor by Carhart (1997) or Profitability and Investment (Fama and French (2015)). We also discuss the reasons why further risk factors besides the market return are priced. Subsequently, we look at the predictability of returns. To explain the predictive power of the price-dividend ratio for future returns, the Campbell-Shiller approximation plays a central role. We also discuss alternative predicting variables like financial ratios or macroeconomic quantities.

In the second part, we consider other asset classes besides stocks. We mainly focus on bonds and currencies and find that the insights from stock markets hold for these assets, too. We revisit the expectations hypotheses and discuss carry trades.

Beginning of the class is around the third week of June. The class will be taught by Valeri Sokolovski from HEC Montréal.

Kurs im HIS-LSF

Semester: SoSe 2019