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FINANCIAL MARKET MODELS

Program

Updated A.Y. 2018-2019

The course will cover the following main areas: Theory of Choice and Expected Utility, Financial Markets and Securities, Efficient Portfolios and Frontier, Single Index Model, Standard and Non-Standard Capital Assets Pricing Model, Multifactor Models, Empirical Test of Equilibrium Models, Efficient Markets Hypothesis.

Course’s objectives are the following:
Teach the student the tools used in financial markets to evaluate the stock return and firm financial performance;
Develop the analytical skills and mindset necessary to make decisions about how market react to an expected/unexpected new information;
Instruct how to value firms’ assets;
Have a working knowledge of MatLab/Python to apply empirically the concepts of financial markets.

Main References:
Elton, E. J. et al., Modern Portfolio Theory and Investment Analysis, Wiley, 2007  -- Chapter 2, 3, 4, 5, 6, 7, 9, 13, 14, 15, 17


Section 1: Market and Securities’ Characteristics (Ch. 1, 2, 3, 4)
Lessons 1, 2, 3, 4, and 5

  • Markets and Indexes Definitions;
  • Prices and Returns of Securities;
  • Prices and Returns of a Portfolio;
  • Problem Set 1: Compute the Stocks and Portfolio’s Return/Risk Prospects.

 

Section 2: Efficient Portfolios and Efficient Frontier (Ch. 5, 6)
Lessons 3, 4 and 5

  • Building the Efficient Frontier;
  • Shape of the Efficient Frontier;
  • Extend the Efficient Frontier allowing for Risk Free Rate and Short Selling;
  • Return Maximization Problem;
  • Problem Set 2: Building the Efficient Frontier.

 

Section 3: Single Index Model (Ch. 7, 9)
Lessons 6 and 7

  • Inputs for the Portfolio Analysis;
  • Single Index Model: Overview and Characteristics;
  • Estimating Stocks and Portfolios’ Market Betas;
  • Building the Frontier with the Single Index Model;
  • Problem Set 3: Estimating the CAPM and the FFC Single Stock Level and for a Portfolio.

 

Section 4: Standard and Non-Standard Capital Assets Pricing Model (Ch. 13, 14, 15)
Lessons 8, 9, 10 and 11

  • Capital Asset Pricing Model by means an Intuitive Approach;
  • Capital Asset Pricing Model by means a Rigorous Approach;
  • Fama-French e Carhart Multifactor Model (FFC);
  • CSR Risk-Factors and the Investors’ Preferences for Responsible Investment;
  • Corporate Social Responsibility, Responsible Investments on the Financial Markets;
  • Responsible Fama-French-Carhart Model (RFFC);
  • Standard Test for Equilibrium Models;
  • Black, Jensen e Sholes Approach;
  • Fama MacBeth Approach;
  • Problem Set 4: Estimating the Factors’ Risk-Premia by using the Fama-MacBeth Approach.

 

Section 5: Efficient Markets Hypothesis (Ch. 17)
Lessons 12 and 13

  • Introduction to the Efficient Market Hypothesis (EMH);
  • Three forms of Market Efficiency;
  • Semi-Strong Market Efficiency and the Event Study Approach1;
  • Tests for the Semi-Strong Market Efficiency;
  • Problem Set 5: Estimating the (C)AR by using the Event Study Approach.

 

Exam:
Class participation (10%);
Take home (25%);
Each Take home MUST BE returned by mail in pdf format. The file MUST BE saved as "surname-name-TH-number" by the following Tuesday at 11:59PM (GMT+1) to roccodotcicirettiatuniroma2dotit
Final exam (65%). You can resit only once. The grade of the resit will be register (included the "fail").