## FINANCIAL MARKET MODELS

## Syllabus

EN
IT

### Learning Objectives

LEARNING OUTCOMES: Theoretical knowledge of financial assets and financial markets.

KNOWLEDGE AND UNDERSTANDING: Evaluation of financial assets available in the markets.

APPLYING KNOWLEDGE AND UNDERSTANDING: Analytical skill to model implementation and coding.

MAKING JUDGEMENTS: Ability to analyze data and parameters to interpret results from estimated model.

COMMUNICATION SKILLS: Clear approach to verbal and written statement related to results and conclusion of the analysis.

LEARNING SKILLS: Ability to analyze solutions from theoretical models with critical approach.

KNOWLEDGE AND UNDERSTANDING: Evaluation of financial assets available in the markets.

APPLYING KNOWLEDGE AND UNDERSTANDING: Analytical skill to model implementation and coding.

MAKING JUDGEMENTS: Ability to analyze data and parameters to interpret results from estimated model.

COMMUNICATION SKILLS: Clear approach to verbal and written statement related to results and conclusion of the analysis.

LEARNING SKILLS: Ability to analyze solutions from theoretical models with critical approach.

### Prerequisites

Consumption theory under uncertentainity.

Expected utility theory.

Expected utility theory.

### Program

Section 1: Market and Securities’ Characteristics.

Introduction to Financial Securities and to Financial Markets;

Definition of Markets and Indexes;

The Prices and the Returns of Securities and Portfolios.

Practice 1: Stocks and Portfolios’ Return and Risk and Introduction of the Efficient Frontier

Section 2: Efficient Portfolios and Efficient Frontier.

Introduction to the Efficient Frontier;

The Shape of the Efficient Frontier;

The Efficient Frontier with Risk Free Rate and Short Selling;

Return Maximization Problem.

Practice 2: The Analysis of the Efficient Frontier and Single Index Model.

Section 3: Single Index Model.

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;

Introduction to the Capital Asset Pricing Model (CAPM).

Section 4 and 5: Standard and Non-Standard Capital Assets Pricing Model.

Intuitive Approach to CAPM;

Rigorous Approach to CAPM (Maximization and consumption problem);

Multi-factor model Approach: Fama-French (F-F) and Carhart Model (FFC);

Asset pricing approach to ESG Risk-Factors

Investors’ Preferences for Responsible Investment;

Responsible Fama-French-Carhart Model (RFFC);

Standard Test for Equilibrium Models;

Black, Jensen e Sholes Approach;

Fama MacBeth Approach.

Practice 3: CAPM and Empirical Tests.

Section 6: Efficient Markets Hypothesis.

Introduction to the Efficient Market Hypothesis (EMH);

Three forms of Market Efficiency;

Semi-Strong Market Efficiency and the Event Study Approach;

Tests for the Semi-Strong Market Efficiency.

Practice 4: Factor Models.

Introduction to Financial Securities and to Financial Markets;

Definition of Markets and Indexes;

The Prices and the Returns of Securities and Portfolios.

Practice 1: Stocks and Portfolios’ Return and Risk and Introduction of the Efficient Frontier

Section 2: Efficient Portfolios and Efficient Frontier.

Introduction to the Efficient Frontier;

The Shape of the Efficient Frontier;

The Efficient Frontier with Risk Free Rate and Short Selling;

Return Maximization Problem.

Practice 2: The Analysis of the Efficient Frontier and Single Index Model.

Section 3: Single Index Model.

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;

Introduction to the Capital Asset Pricing Model (CAPM).

Section 4 and 5: Standard and Non-Standard Capital Assets Pricing Model.

Intuitive Approach to CAPM;

Rigorous Approach to CAPM (Maximization and consumption problem);

Multi-factor model Approach: Fama-French (F-F) and Carhart Model (FFC);

Asset pricing approach to ESG Risk-Factors

Investors’ Preferences for Responsible Investment;

Responsible Fama-French-Carhart Model (RFFC);

Standard Test for Equilibrium Models;

Black, Jensen e Sholes Approach;

Fama MacBeth Approach.

Practice 3: CAPM and Empirical Tests.

Section 6: Efficient Markets Hypothesis.

Introduction to the Efficient Market Hypothesis (EMH);

Three forms of Market Efficiency;

Semi-Strong Market Efficiency and the Event Study Approach;

Tests for the Semi-Strong Market Efficiency.

Practice 4: Factor Models.

### Books

Elton, E. J. et al., Modern Portfolio Theory and Investment Analysis, Wiley, 2007

### Bibliography

Campbell, J. Y., Lo, A.W. C., and MacKinlay, A. C. (1997). The econometrics of financial markets. princeton University press.

Ciciretti R., Dalò A., and Dam L., The Price of Taste for Socially Responsible Investments, CEIS Research Paper No. 413, 2017

Becchetti L., Ciciretti R., and Dalò A. Fishing the corporate social responsibility risk factors. CEIS Research Paper No. 368, 2016.

Becchetti, L., Ciciretti, R., Dalò, A., and Herzel, S. Socially responsible and conventional investment funds: performance comparison and the global financial crisis. Applied Economics, 47(25), 2541-2562, 2015.

Carhart M. M. On persistence in mutual fund performance. The Journal of Finance, 52(1):57–82, 1997.

Fama E. and French K. R. International tests of a five-factor asset pricing model. Journal of Financial Economics, 123(3):441–463, 2017.

Fama E. F. and French K. R. A five-factor asset pricing model. Journal of Financial Economics, 116(1):1–22, 2015.

Fama E. and French K. R. Size, value, and momentum in international stock returns. Journal of Financial Economics, 105(3):457–472, 2012.

Fama E. and French K. R. Multifactor explanations of asset pricing anomalies. The Journal of Finance, 51(1):55–84, 1996.

Fama E. and French K. R. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1):3–53, 1993.

Fama E. and French K. R. The cross-section of expected stock returns. The Journal of Finance, 47(2):427–465, 1992.

Fama E. F. and MacBeth J. D. Risk, return, and equilibrium: Empirical tests. The Journal of Political Economy, 81(3):607–636, 1973.

Jegadeesh, N. and Titman, S. Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of Finance, 48(1), 65-91, 1993

Jensen M. C. The performance of mutual funds in the period 1945-1964. The Journal of Finance, 23(2):389–416, 1968.

Lintner J. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics, 47(3):13–37, 1965.

Mossin J. Equilibrium in a capital asset market. Econometrica: Journal of the Econometric Society, 34(4):768–783, 1966.

Sharpe W. F. Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3):425–442, 1964.

Ciciretti R., Dalò A., and Dam L., The Price of Taste for Socially Responsible Investments, CEIS Research Paper No. 413, 2017

Becchetti L., Ciciretti R., and Dalò A. Fishing the corporate social responsibility risk factors. CEIS Research Paper No. 368, 2016.

Becchetti, L., Ciciretti, R., Dalò, A., and Herzel, S. Socially responsible and conventional investment funds: performance comparison and the global financial crisis. Applied Economics, 47(25), 2541-2562, 2015.

Carhart M. M. On persistence in mutual fund performance. The Journal of Finance, 52(1):57–82, 1997.

Fama E. and French K. R. International tests of a five-factor asset pricing model. Journal of Financial Economics, 123(3):441–463, 2017.

Fama E. F. and French K. R. A five-factor asset pricing model. Journal of Financial Economics, 116(1):1–22, 2015.

Fama E. and French K. R. Size, value, and momentum in international stock returns. Journal of Financial Economics, 105(3):457–472, 2012.

Fama E. and French K. R. Multifactor explanations of asset pricing anomalies. The Journal of Finance, 51(1):55–84, 1996.

Fama E. and French K. R. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1):3–53, 1993.

Fama E. and French K. R. The cross-section of expected stock returns. The Journal of Finance, 47(2):427–465, 1992.

Fama E. F. and MacBeth J. D. Risk, return, and equilibrium: Empirical tests. The Journal of Political Economy, 81(3):607–636, 1973.

Jegadeesh, N. and Titman, S. Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of Finance, 48(1), 65-91, 1993

Jensen M. C. The performance of mutual funds in the period 1945-1964. The Journal of Finance, 23(2):389–416, 1968.

Lintner J. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics, 47(3):13–37, 1965.

Mossin J. Equilibrium in a capital asset market. Econometrica: Journal of the Econometric Society, 34(4):768–783, 1966.

Sharpe W. F. Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3):425–442, 1964.

### Teaching methods

Lecture.

Practice (with coding).

Two Take Home (on Moodle).

Practice (with coding).

Two Take Home (on Moodle).

### Exam Rules

2 Take Home (20% for each of the two).

Class participation (10%).

Written final exam (50%): theory and exercise.

All students will be totally involved in the learning process starting from the weekly practice class and the two TH process, and ending with the final written exam. The two TH are related to the weekly theoretical topic and to the practice class. At the end of the six weeks all the topics are covered and absorbed by the student with the TH, so each student is ready to take the Final exam to demonstrate: their theoretical knowledge of financial assets and financial markets; the ability to empirically evaluate each financial assets in the market throught their analytical skill and model implementation using coding program. Finally, the student will be able to analyze data and parameters to interpret results from estimated model, and to implement verbal and written statement related to results and conclusion of the analysis.

No resit is allowed in the same exam session.

The criteria to formulate the final grade expressed in 30 over 30 are the following

- Fail: significant inaccuracies in knowledge and in understanding topics; limited analysis and synthesis skills, frequent generalizations.

- 18-20: sufficient knowledge and understanding of topics with some lacks; sufficient analysis, synthesis, and independent judgment skills.

- 21-23: standard knowledge and understanding of topics; pritty correct analysis and synthesis skills with coherent logical argumentation.

- 24-26: good knowledge and understanding of topics; good analysis and synthesis skills with rigorous argumentation and approach.

- 27-29: comprehensive knowledge and understanding of topics; remarkable analysis and synthesis skills. Good and independent judgment.

- 30-30L: excellent level of knowledge and understanding of topics. Remarkable analysis, synthesis, and independent level of judgment skills. Arguments expressed in original way.

Class participation (10%).

Written final exam (50%): theory and exercise.

All students will be totally involved in the learning process starting from the weekly practice class and the two TH process, and ending with the final written exam. The two TH are related to the weekly theoretical topic and to the practice class. At the end of the six weeks all the topics are covered and absorbed by the student with the TH, so each student is ready to take the Final exam to demonstrate: their theoretical knowledge of financial assets and financial markets; the ability to empirically evaluate each financial assets in the market throught their analytical skill and model implementation using coding program. Finally, the student will be able to analyze data and parameters to interpret results from estimated model, and to implement verbal and written statement related to results and conclusion of the analysis.

No resit is allowed in the same exam session.

The criteria to formulate the final grade expressed in 30 over 30 are the following

- Fail: significant inaccuracies in knowledge and in understanding topics; limited analysis and synthesis skills, frequent generalizations.

- 18-20: sufficient knowledge and understanding of topics with some lacks; sufficient analysis, synthesis, and independent judgment skills.

- 21-23: standard knowledge and understanding of topics; pritty correct analysis and synthesis skills with coherent logical argumentation.

- 24-26: good knowledge and understanding of topics; good analysis and synthesis skills with rigorous argumentation and approach.

- 27-29: comprehensive knowledge and understanding of topics; remarkable analysis and synthesis skills. Good and independent judgment.

- 30-30L: excellent level of knowledge and understanding of topics. Remarkable analysis, synthesis, and independent level of judgment skills. Arguments expressed in original way.