Walter A. Haas School of Business
U.C. Berkeley
Fall, 1998

BA238C: Doctoral Seminar in Finance

Empirical Topics

Professor Terry A. Marsh

Office:   Faculty Wing F651

Phone:   (510) 642-1651

Course Description:

The course provides an introduction to empirical research in finance, heavily skewed toward "capital markets." (If you want to pursue empirical corporate finance research, please see me for references in that area). The course is discussion-oriented. A paper, which is to be original research or a critical review of an area, is required.

Last Revised: August 21, 1998

ã Terry A. Marsh, 1998


1. Structure in Asset Returns

1.1 Predictability of Asset Returns

Lee, Charles M.C., and Bhaskaran Swaminathan, 1998, "Price Momentum and Trading Volume," Unpublished Paper, Cornell University, June 23.

Hong, Harrison, Terence Lim, and Jeremy Stein, 1998, "Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies," Working paper, Stanford Business School.

Jegadeesh, Narasimhan, and Sheridan Titman, 1993, "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," The Journal of Finance, XLVIII(1), March, 1993, 65-91.

McQueen, Grant, Michael Pinegar, and Steven Thorley, 1996, "Delayed Reaction to Good News and the Cross-Autocorrelation of Portfolio Returns," Journal of Finance, LI(3), July, 889-919.

Lakonishok, Josef, Andrei Shleifer, and Robert Vishny, 1994, "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, XLIX(5), December, 1541-1578.

Grundy, Bruce D., and J. Spencer Martin, 1998, "Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing," Unpublished Paper, Wharton, May.

Lyon, John D., Brad Barber, and Chih-Ling Tsai, 1998, "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Unpublished Paper, U.C. Davis, Forthcoming: Journal of Finance.

Keim, Donald B., 1988, "Stock Market Regularities: A Synthesis of the Evidence and Explanations," in Elroy Dimson, ed.: Stock Market Anomalies, Cambridge University Press, Cambridge.

Grossman, Sanford, 1995, "Dynamic Asset Allocation and the Informational Efficiency of Markets, Journal of Finance, 50(3), July, 773-787.

1.2 "Behaviorial Finance" Models

O'Dean, Terry, 1996, "Do Investors Trade Too Much?", Unpublished Paper.

O'Dean, Terry, 1996, "Are Investors Reluctant to Realize their Losses?", Unpublished Paper. Forthcoming: Journal of Finance.

Daniel, Kent, and David Hirshleifer, 1997, "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions, Working Paper 97-1, School of Business, The University of Michigan.

Fama, Eugene F., 1997, "Market Efficiency, Long-Term Returns, and Behaviorial Finance, Unpublished Paper, University of Chicago, June.

Arthur, W. Brian, 1992, "On Learning and Adaptation in the Economy," Santa Fe Institute Research Paper 92-07-038.

1.3 Event Studies

MacKinlay, A. Craig, 1997, "Event Studies in Economics," Journal of Economic Literature, March 1997, pp. 13-39.

1.4 Time Series Models for Asset Returns-ARCH, GARCH, etc.

Bollerslev, T., R. Chou, and K. Kroner, 1992, "ARCH Modelling in Finance," Journal of Econometrics, 52, 5-59.

Ding, Zhuanxin, C.W.J. Granger, and Robert F. Engle, 1993, "A Long Memory Property of Stock Market Returns and a New Model," Journal of Empirical Finance, 1, 83-106.

Clive W.J. Granger, and Zhuanxin Ding, 1995, "Some Properties of Absolute Return: An Alternative Measure of Risk," UCSD Department of Economics Discussion Paper 94-19.

Ding, Zhuanxin, and Clive W.J. Granger, 1996, "Modeling Volatility Persistence of Speculative Returns: A New Approach," Journal of Econometrics, 73, 185-215.

Engle, Robert F., and Gary G.J. Lee, 1992, "A Permanent and Transitory Component Model of Stock Return Volatility," UCSD, Department of Economics, Discussion Paper 92-44, November.

Harvey, Andrew C., 1993, "Long Memory in Stochastic Volatility," Unpublished Paper, Statistics Department, London School of Economics, Houghton Street, London, WC2A 2AE, November 24.

Baillie, Richard T., 1996, "Long Memory Processes and Fractional Integration in Econometrics," Journal of Econometrics, 73, 5-59.

Bollerslev, Tim, and Hans Ole Mikkelsen, 1996, "Modeling and Pricing Long Memory in Stock Market Volatility," Journal of Econometrics, 73, 151-184.

Harrison, Paul, 1994, "Are All Financial Time-Series Alike?" Unpublished Paper, Duke University, January.

Andersen, Torben, and Tim Bollerslev, 1998, "Answering the Skeptics: Yes, Standard Models Do Provide Accurate Forecasts," Unpublished Paper, Northwestern University, January.

1.4 Non-ARCH/GARCH Models for Volatility

Whitelaw, Robert F., 1994, "Time Variation and Covariations in the Expectation and Volatility of Stock Market Returns," Journal of Finance, 49(2), 515-541.

Glosten, Lawrence R., Ravi Jagannathan, and David Runkle, 1993, "On the Relation Between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Federal Reserve Bank of Minneapolis, Research Department Staff Report #157, July.

1.5 Multivariate Variance-Covariance Estimation

Ledoit, Olivier, 1994, "Portfolio Selection: Improved Covariance Matrix Estimation," Working Paper, MIT, November.

Kelly, Michael A., 1994, "The U.S. Equity Market Has Become More Diversified," J.P. Morgan Securities Inc., Global Equity Derivatives Research, March 11.

Mayhew, Stewart, and Terry Marsh, 1996, "Shifting Return Covariances and the Information in Implied Volatilities, Working Paper, U.C. Berkeley, July.

Kenneth Kroner and Victor Ng, 1995, "Modelling the Time Varying Comovements of Asset Returns," Unpublished Monograph, Wells Fargo-Nikko, June.

Hamao, Yasushi, Ronald Masulis, and Victor Ng, 1990, "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, 3(2), 281-307.

Michael S. Gibson and Brian Boyer, 1997, "Evaluating Forecasts of Correlation using Option Pricing," Board of Governors, International Finance Discussion Papers Number 600, December.

1.6 Time Deformation & Subordination

Clark, Peter K., 1973, "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, 41(1), January, 135-159.

Stock, James H., 1987, "Measuring Business Cycle Time," Journal of Political Economy, 95(6), 1240-1261.

Kempthorne, Peter, and Terry A. Marsh, 1990, "Stock Price Subordination in a State Space Specification," Unpublished Working Paper, MIT and U.C. Berkeley

Ghysels, Eric, and Joanna Jasiak, 1996, "Stochastic Volatility and Time Deformation: An Application to Trading Volume and Leverage Effects," Unpublished Paper, September.

Conley, Timothy G., Lars P. Hansen, Erzo Luttmer, and Jose Scheinkman, 1997, "Short-Term Interest Rates as Subordinated Diffusions," The Review of Financial Studies, 10(3), Fall, 525-577

Mandelbrot, Benoit, Adlai Fisher, and Laurent Calvet, 1997, "A Multifractal Model of Asset Returns," Discussion Paper No. 1164, Cowles Foundation for Research in Economics at Yale University, New Haven.

Mandelbrot, Benoit, Adlai Fisher, and Laurent Calvet, 1997, "Large Deviations and the Deviations of Price Changes," Discussion Paper No. 1165, Cowles Foundation for Research in Economics at Yale University, New Haven.

Muller, Ulrich, Michel M., Dacorogna, Rakhal Dave, Richard Olsen, Olivier Pictet, and Jakob von Wiezsacker, 1995, "Volatilities of Different Time Resolutions - Analyzing the Dynamics of Market," Olsen & Associates Preprint, June 28.

1.7 Time Series Models for Asset Returns--General

Brock, W.A., "Distinguishing Random and Deterministic Systems: Abridged Version," Journal of Economic Theory.

Brock, W.A., and Cheryl L. Sayers, 1988, "Is the Business Cycle Characterized by Deterministic Chaos?" Journal of Monetary Economics, 22, 71-90.

Brock, William A., David A. Hsieh, and Blake LeBaron, 1991, Nonlinear Dynamics, Chaos, and Instability: Statistical Theory and Economic Evidence, Cambridge MA: MIT Press.

1.8 Extreme Values in Stock Price Changes

Jon Danielsson, "Market Crashes and the Analysis of Financial Extremes" London School of Economics

Dacorogna, Michel M., Ulrich Muller, Olivier Pictet, and Casper de Vries, 1995, "The Distribution of Extremal Foreign Exchange Rate Returns in Extremely Large Data Sets," Olsen & Associates Preprint, June 28.

Bouchard, J.P., D. Sornette, C. Walter, and J.P. Agular, "Taming Large Events: Optimal Portfolio Theory for Strongly Fluctuating Assets," forthcoming: Mathematical Finance.

1.9 Implied Stock Price Volatilities, Distributions, Binomial Trees

Nelson, Daniel, and Krishna Ramaswamy, 1990, "Simple Binomial Models as Diffusion Approximations in Financial Models," Review of Financial Studies, 3(3), 393-430

Mayhew, Stewart, 1994, "Implied Volatility: A Review," Working Paper, U.C. Berkeley, November 7. Forthcoming: Financial Analysts Journal.

Derman, Emanuel, and Iraj Kani, 1994, "Riding on a Smile," Risk, 7(2), February, 32-39.

Derman, Emanuel, and Iraj Kani, 1994, "The Volatility Smile and Its Implied Tree," Goldman Sachs, Quantitative Strategies Research Notes, January.

Dupire, Bruno, 1993, "Model Art," Risk, 6(9), September, 118-124.

Rubinstein, Mark, 1994, "Implied Binomial Trees," Journal of Finance, 69(3), July, 771-818.

Shimko, David, 1993, "Bounds of Probability," Risk, 6(4), April, 33-37.

Kuwahara, Hiroto, and Terry A. Marsh, 1994, "Why Doesn't the Black-Scholes Model Fit Japanese Warrants and Convertible Bonds?" forthcoming: Japanese Journal of Financial Economics, 1(1), December, 33-65.

Jackwerth, Jens Carsten, and Mark Rubinstein, 1996, "Recovering Probability Distributions from Contemporaneous Security Prices,": Journal of Finance LI(5), December, 1611-1631.

Jackwerth, Jens Carsten, 1996, "Implied Binomial Trees: Generalizations and Empirical Tests," Working Paper No. RPF-262, U.C. Berkeley, June.

Das Sanjiv, "Of Smiles and Smirks: Higher-Order Moments in Modeling Asset Price Processes in Finance" Harvard Business School

Derman, Emanuel, 1998, "Volatility Regimes: A Look at How, When, and Why Implied Volatilities Change," Goldman Sachs & Co.

Cochrane, John, and Jesus Saa-Requejo, 1997, "Beyond Arbitrage: "Good Deal" Asset Price Bounds in Incomplete Markets," Unpublished Paper, University of Chicago, October 3.

Rookley, Cameron, 1997, "Fully Exploiting the Information Content of Intra Day Option Quotes: Applications in Option Pricing and Risk Management," University of Arizona, November.

Rubinstein, Mark, and Jens Jackwerth, 1997, "Recovering Probabilities and Risk Aversion from Options Prices and Realized Returns," September.

Rubinstein, Mark, and Jens Jackwerth, 1996, "Recovering Stochastic Processes from Option Prices," December 7.

Hodges, Stewart, et. al.

1.10 High Frequency Data

Espejel, Raul, 1998, "Endogeneity of Time between Stock Price Movements and Asymmetry of Price Transitions: An Empirical Analysis," Unpublished Dissertation, U.C. Berkeley.

Lundin, Mark, Michel Dacorogna, and Ulrich Muller, "Correlation of High-Frequency Financial Time Series," Olsen & Associates, Switzerland.

[Check: "The Financial Markets Tick by Tick," ed. By Pierre Lequeux, forthcoming John Wiley & Sons.].

1.11 Genetic Algorithms, Neural Networks

The Economist, 1993, "The Mathematics of Markets," October 9, 1993.

Hutchinson, James M., Andrew W. Lo, and Tomaso Poggio, 1994, "A Nonparametric Approach to Pricing and Hedging Derivative Securities via Learning Networks," Journal of Finance, 49(3), July, 851-889.

Arthur, W. Brian, 1992, "On Learning and Adaptation in the Economy," Santa Fe Institute Research Paper 92-07-038.

1.12 Empirical Analysis in Finance---Selection and Survivorship Biases

Leamer, Edward E., 1978, Specification Searches: Ad Hoc Inference with Nonexperimental Data, Wiley, New York.

Brown, Stephen J., William Goetzmann, Roger G. Ibbotson, and Stephen A. Ross, 1992, "Survivorship Bias in Performance Studies," Review of Financial Studies, 5(4), 553-580.

Lo, Andrew W., and A. Craig MacKinlay, 1990, "Data-Snooping Biases in Tests of Financial Asset Pricing Models," Review of Financial Studies, 3(3), 431-468.

Richardson, Matthew, and James H. Stock, 1989, "Drawing Inferences from Statistics Based on Multiyear Asset Returns," Journal of Financial Economics, 25, 323-348.

Foster, F. Douglas, and Smith, Tom, 1994, "Assessing Goodness-of-Fit of Asset Pricing Models: The Distribution of the Maximal ," Unpublished Paper, Duke University, March 17.

2. Topics

2.1 Asset Return Factor Models

Chamberlain, Gary, and Michael Rothschild, 1983, "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Econometrica, 51(5), 1281-1303.

Bansal, Ravi, and S. Viswanathan, 1993, "No Arbitrage and Arbitrage Pricing: A New Approach," Journal of Finance, 48(4), September, 1231-1262.

Fedrigo, Indro, Terry A. Marsh, and Paul Pfleiderer, 1994, "A Comparison of Implicit and Explicit Factor Models of Security Returns," Unpublished Draft, February.

Brown, Stephen J., 1989, "The Number of Factors in Security Returns," Journal of Finance, 34(5), December, 1247-1262.

Lehmann, Bruce N., and David M. Modest, 1988, "The Empirical Foundations of the Arbitrage Pricing Theory," Journal of Financial Economics, 21 (September), 213-254.

Connor, Gregory C., and Robert Korajczyk, 1993, "The Arbitrage Pricing Theory and Multifactor Models of Asset Returns," Working Paper #139, Kellogg School of Management, Northwestern University, September. Forthcoming: Handbooks in Management Science: Finance, ed. by Robert Jarrow, Vojislav Maksimov, and William Ziemba, North-Holland, 1995.

J.P. Morgan, 1994, "Introduction to RiskMetrics," Market Risk Research, October 6.

Grinold, Richard, Andrew Rudd, and Dan Stefek, 1989, "Global Factors: Fact or Fiction?" Journal of Portfolio Management, 16(1), Fall, 79-88.

2.2 Factor Analysis Techniques

Huang, Roger D., and Hoje Jo, 1992, "Transformed Securities and Alternative Factor Structures," Journal of Finance, 47(1), March, 397-405.

Brown, Stephen J., 1989, "The Number of Factors in Security Returns," Journal of Finance, 34(5), December, 1247-1262.

Shukla, Ravi, and Charles Trzcinka, 1990, "Sequential Tests of the Arbitrage Pricing Theory: A Comparison of Principal Components and Maximum Likelihood Factors," Journal of Finance, 45(5), December, 1541-1564.

2.3 International Factor Models

Korajczyk, Robert A., and Claude J. Viallet, 1989, "An Empirical Investigation of International Asset Pricing," Review of Financial Studies, 2(4), 553-585.

King, Mervyn, Enrique Sentana, and Sushil Wadhwani, 1994, "Volatility and Links Between National Stock Markets," Econometrica, 62(4), July, 901-933.

Marsh, Terry A., and Paul Pfleiderer, 1997, "The Role of Country and Industry Effects in Explaining Global Stock Returns," Working Paper, U.C. Berkeley and Stanford University, August 24, 1997

Heston, Steven L., and K. Geert Rouwenhorst, 1994, "Does Industrial Structure Explain the Benefits of International Diversification?" Journal of Financial Economics, 36, 3-27.

Longin, Francois, and Bruno Solnik, 1993, "Is the Correlation in International Equity Returns Constant: 1960-1990?" Department of Finance and Economics, HEC-School of Management, June 14.

Harvey, Campbell R., 1991, "The World Price of Covariance Risk," Journal of Finance, 46(1), March, 111-157.

Amner, John, and Jianping Mei, 1994, "Measuring International Economic Linkages with Stock Market Data," Working Paper, International Finance Division, Federal Reserve Board, August.

2.4 Asset Pricing--Overview

Ferson, Wayne E., 1993, "Theory and Empirical Testing of Asset Pricing Models," forthcoming: Handbooks in Management Science: Finance, ed. by Robert A. Jarrow, Vojislav Maksimovic, and William T. Ziemba, North-Holland, 1995.

Kocherlakota, Narayana, 1996, "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, 34, March, 42-71.

Economist: "Welcome to Bull Country," July 18, 1998, 21-23.

Basak, Suleyman, and Domenico Cuoco, 1997, "An Equilibrium Model with Restricted Stock Market Participation," Working Paper, Wharton School.

2.5 Asset Pricing--Changing Parameters

Whitelaw, Robert F., 1994, "Time Variation and Covariations in the Expectation and Volatility of Stock Market Returns," Journal of Finance, 49(2), 515-541.

Ferson, Wayne E., and Campbell Harvey, 1992, "The Risk and Predictability of International Equity Returns," Paper presented to the Berkeley Program in Finance, Santa Barbara, September 13-15.

Bodurtha, James N., Jr., and Nelson C. Mark, 1991, "Testing the CAPM with Time-Varying Risks and Returns," Journal of Finance, 46(4), September, 1485-1505.

Handa, Puneet, S. P. Kothari, and Charles Wasley, 1993, "Sensitivity of Multivariate Tests of the Capital Asset-Pricing Model to the Return Measurement Interval," Journal of Finance, 48(4), September, 1543-1551.

2.6 Asset Pricing Tests

Shanken, Jay, 19??, "The Current State...."

Bray, Margret, 1994a, "The Arbitrage Pricing Theory is not Robust 1: Variance Matrices and Portfolio Theory in Pictures," Discussion Paper No. 178, LSE Financial Markets Group.

Bray, Margret, 1994b, "The Arbitrage Pricing Theory is not Robust 2: Factor Structures and Factor Pricing," Discussion Paper No. 179 , LSE Financial Markets Group.

Black, Fischer, 1993, "Beta and Return," Journal of Portfolio Management, Fall, 8-18.

Roll, Richard, and Stephen A. Ross, 1994, "On the Cross-Sectional Relation Between Expected Returns and Betas," Journal of Finance, 49(1), March, 101-121.

Jagannathan, Ravi, and Zhenyu Wang, 1993, "The CAPM is Alive and Well, Working Paper, University of Minnesota.

Merton, Robert C., 1987, "Presidential Address: A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, 42, 483-510.

2.7 Asset Pricing-Illiquidity and Market Microstructure

Vayanos, Dimitri, and Jean-Luc Vila, 1994, "Equilibrium Interest Rate and Liquidity Premium Under Proportional Transactions Costs," Unpublished Paper, Stanford University and MIT.

Brennan, Michael J., and Avanidhar Subrahmanyam, 1996, "Market Microstructure and Asset Pricing: On the Compensation for Illiquidity in Stock Returns," Journal of Fianancial Economics, 41, 441-464.

2.8 Segmentation, Home Country Bias

Tesar, Linda L., and Ingrid M. Werner, 199?, "Home Bias and High Turnover."

Tesar, Linda L., and Ingrid M. Werner, 1993, "International Equity Transactions and U.S. Portfolio Choice," November 1993.

Chen, Zhiwu, and Peter J. Knez, 1994, "Measurement of Market Integration and Arbitrage," Working Paper, University of Wisconsin-Madison, July.

Bekaert, Geert, and Campbell R. Harvey, 1994, "Time-Varying World Market Integration," Graduate School of Business, Stanford University.

Joshua Coval, and Tobias Moskowitz, 1997, "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Unpublished Paper, University of Michigan.

Joshua Coval, and Tobias Moskowitz, 1997, "The Geography of Investment: Are There Gains to Investing Locally," Unpublished Paper, University of Michigan.

Grossman, Sanford J., 1995, "Dynamic Asset Allocation and the Informational Efficiency of Markets," Journal of Finance, L(3), July, 773-787.

Brennan, Michael J., and Henry Cao, 1997, "International Portfolio Investment Flows," Working Paper RPF-271, U.C. Berkeley.

2.9 Finance and Fundamentals Models

Summers, Lawrence, 1985, "On Economics and Finance," Journal of Finance, 40(3), July, 633-635.

Marsh, T.A., 1986, "On Euler-Equation Restrictions on the Temporal Behavior of Asset Returns," Working Paper #1619-84, Sloan School of Management, MIT, December.

Marsh, Terry A., and Robert C. Merton, 1987, "Dividend Behavior for the Aggregate Stock Market," Journal of Business, 60, January, 1-40.

Kleidon, Allan W., 1986, "Variance Bounds Tests and Stock Price Valuation Models," Journal of Political Economy, 94, 953-1001.

Gilles, C., and Stephen LeRoy, 1991, "Econometric Aspects of the Variance-Bounds Tests: A Survey," Review of Financial Studies, 4, 753-791.

Cochrane, John, Review of Shiller's book...

Cochrane, John, 1991, "Volatility Tests and Efficient Markets: A Review Essay," Journal of Monetary Economics, 27, 463-485.

Ou, Jane A., and Stephen H. Penman, 1989, "Financial Statement Analysis and the Prediction of Stock Returns," Journal of Accounting and Economics, 11, 295-329.

Ou, Jane A., and Stephen H. Penman, 1994, "Financial Statement Analysis and the Evaluation of Market-to-Book Ratios," Unpublished Paper, Santa Clara University and U.C. Berkeley, May.

2.10 Term Structure---Models

Marsh, Terry A., 1994, "Term Structure of Interest Rates and the Pricing of Fixed Income Claims and Bonds," forthcoming: Handbooks in Operations Research and Management Science: Finance, ed. by R. Jarrow, M. Maksimovic, and W. Ziemba, January 31.

Cox, John C., Jonathan E. Ingersoll Jr., and Stephen A. Ross, 1985, "A Theory of the Term Structure of Interest Rates," Econometrica, 53(2), 385-407.

Hull, John, and Alan White, 1990, "Pricing Interest Rate Derivative Securities," Review of Financial Studies, 3:4, 573-92.

Constantinides, George M., 1992, "A Theory of the Nominal Term Structure of Interest Rates," Review of Financial Studies, 5(4), 531-552.

Carverhill, A., 1992, "Interest Rate Option Valuation Models: A Note about the Behavior of the Volatility Structure," Unpublished Paper, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, June 30.

2.11 Term Structure--Arbitrage-Free Restrictions and Calibration

Marsh, 1994, Section ?.?

Black, Fischer, Emanuel 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.

2.12 Term Structure Models---Fitting Interest Rate and Term-Structure Models

Marsh, Terry A., and Eric R. Rosenfeld, 1983, "Stochastic Processes for Interest Rates and Equilibrium Bond Prices," Journal of Finance, 38, 635-646.

Chan, K.C., G. Andrew Karolyi, Francis A. Longstaff, and Anthony B. Sanders, 1992, "An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, 47(3), July, 1209-1227.

Brown, Roger H., and Stephen M. Schaefer, 1994, "The Term Structure of Interest Rates and the Cox, Ingersoll, and Ross Model," Journal of Financial Economics, 35, 3-42.

Marsh, Terry A., 1980, "Equilibrium Term Structure Models: Test Methodology," Journal of Finance, 35(2), May, 421-435.

Heath, David, Robert Jarrow, and Andrew Morton, 1992, "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims," Econometrica, 60(1), January, 77-105.

Vetzal, Kenneth R., 1993, "A Survey of Stochastic Continuous Time Models of the Term Structure of Interest Rates," University of Waterloo, Faculty of Arts, School of Accountancy, forthcoming: Insurance: Mathematics and Economics.

Canabarro, Eduardo, 1993, "Comparing the Dynamic Accuracy of Yield-Curve-Based Interest Rate Contingent Claims," The Journal of Financial Engineering, 2(4), December, 365-401.

Canabarro, Eduardo, 1994, "Pricing and Hedging Interest Rate Derivatives with Extended One-Factor Yield-Curve-Based Models," Unpublished Paper, Bond Portfolio Analysis, Salomon Brothers Inc., May.

Flesaker, Bjorn, 1993, "Testing the Heath-Jarrow-Morton/Ho-Lee model of Interest Rate Contingent Claims Pricing," Journal of Financial and Quantitative Analysis, 28(4), December, 483-495.

Litterman, Robert, and Jose Scheinkman, 1991, "Common Factors Affecting Bond Returns," Journal of Fixed Income, 1(1), 54-61.

Gray, Stephen F., 1993, "Regime-Switching Models: A New Approach," Unpublished Working Paper, Graduate School of Business, November.

Ait-Sahalia, Yacine, 1992, "Nonparametric Pricing of Interest-Rate Derivative Securities," Working Paper, Department of Economics, MIT, November.

Ait-Sahalia, Yacine, 1992, "The Delta and Bootstrap Methods for Nonlinear Functionals of Nonparametric Kernel Estimators Based on Dependent Multivariate Data," Working Paper, Department of Economics, MIT, October.

Stanton, Richard, 1996, "A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk, Working Paper, U.C. Berkeley, August 5.

2.13 Option Prices in the Presence of Trading Costs

Toft,Klaus Bjerre, 1994, "Exact Formulas for Expected Hedging Error and Transactions Costs in Option Replication," Research Program in Finance Working Paper Series No. 237, July.

Boyle, Phelim P., and Ton Vorst, 1992, "Option Replication in Discrete Time with Transactions Costs," Journal of Finance, 47(1), March, 271-293.

Constantinides, George, 1993, "Option Pricing with Transactions Costs," Unpublished Paper, University of Chicago, Graduate School of Business.

2.14 Credit/Default Risk

Sarig, O., and A. Warga, 1989, "Some Empirical Estimates of the Risk Structure of Interest Rates," Journal of Finance, 44(5), December, 1351-1360.

Pitts, C.G.C., and M.J.P. Selby, 1993, "The Pricing of Corporate Debt: A Further Note," Journal of Finance, 38(4), September, 1311-1313.

Blume, M.E., D.B. Keim, and S.A. Patel, 1991, "Returns and Volatility of Low-Grade Bonds: 1977-1989," Journal of Finance, 66(1) (March), 49-74.

Cornell, B., and K. Green, 1991, "The Investment Performance of Low-Grade Bond Funds," Journal of Finance, 66(2), June, 29-48.

Gennotte, Gerard, and Terry A. Marsh, 1993, "The Term Structure, Equity Returns, and Yield Premiums on Risky Bonds," Working Paper, U.C. Berkeley and University of Tokyo, September 4.

Longstaff, Francis A., and Eduardo S. Schwartz, 1993, "Valuing Risky Debt: A New Approach," Working Paper, UCLA Anderson Graduate School of Management, September.

Bohn, Jeffrey, 1997, "Finding Structure in the Term Structure of Credit Spreads," Manuscript, U.C. Berkeley.

2.15 Exchange Rate Behavior

Flood, Robert P., and Mark P. Taylor, 1994, "Exchange Rate Economics: What's Wrong with the Conventional Macro Approach?" Paper presented at the NBER-CEPR-Banca D'Italia Conference on the Microstructure of Foreign Exchange Markets, Perugia, Italy, July 1-2.

Baillie, Richard T., and Tim Bollerslev, 1994, "Cointegration, Fractional Cointegration, and Exchange Rate Dynamics," Journal of Finance, 49(2), June, 737-745.

Mahieu, Ronald, and Peter Schotman, 1994, "Stochastic Volatility and the Distribution of Exchange Rate News," Discussion Paper 96, Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis, December.

Bekaert, Geert, and Robert J. Hodrick, 1992, "Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," Journal of Finance, 37(2), 467-509.

DeJong, David N., and Steven Husted, 1993, "Towards a Reconciliation of the Empirical Evidence on the Monetary Approach to Exchange Rate Determination," Review of Economics and Statistics, 75(1), February, 123-128.

Goodhart, C. A. E., and M. Giugale, 1993, "From Hour to Hour in the Foreign Exchange Market," Manchester School of Economics and Social Studies, 61(1), March, 1-34.

Diba, Behzad T., 1987, "A Critique of Variance Bounds Tests for Monetary Exchange Rate Models," Journal of Money, Credit and Banking, 19(1), February, 104-111.

Ruiz, Esther, 1994, "Quasi-Maximum Likelihood Estimation of Stochastic Volatility Models," Journal of Econometrics, 63(1), July, 289-306.

Bollerslev, Tim, and Michael Melvin, 1994, "Bid-Ask Spreads and Volatility in the Foreign Exchange Market--An Empirical Analysis," Journal of International Economics, 36(3,4), May, 355-372.

Baillie, R. T. and T. Bollerslev, 1991, "Intra-Day and Inter-Market Volatility in Foreign Exchange Rates," Review of Financial Studies, 58, 565-585.

Hogan, Kedreth C., Jr., and Michael T. Melvin, 1994, "Sources of Meteor Showers and Heat Waves in the Foreign Exchange Market," Journal of International Economics, 37(3,4) November, 239-247.

2.16 Portfolio & Asset Allocation---Currency Hedging

Adler, Michael, and Bhaskar Prasad, 1992, "On Universal Currency Hedges," Journal of Financial and Quantitative Analysis, 27(1), March, 19-37.

Adler, Michael, and Philippe Jorion, 1992, "Universal Currency Hedges for Global Portfolios," Journal of Portfolio Management, Summer, 28-35.

Black, Fischer, 1990, "Equilibrium Exchange Rate Hedging," Journal of Finance, 45(3), July, 899-907.

Bilson, John F.O., 199?, "Hedging Currency Risk," Paper presented to the Berkeley Program in Finance,

Throop, Adrian W., 1994, "Linkages of National Interest Rates," Federal Reserve Bank of San Francisco Weekly Letter, Number 94-29, September 2.

2.17 Portfolio & Asset Allocation---Performance Assessment

Admati, Anat, and Paul Pfleiderer, 1995, "Does It All Add Up? Benchmarks, Specialization, and the Compensation of Active Portfolio Managers," Working Paper, Stanford University, June.

2.18 Market Microstructure

Black, Fischer, 1991, "Trading in Equilibrium with Bluffing, Credits, and Debits," Unpublished Paper, Goldman Sachs & Co., April 4.

Belonsky, Gail M., and David M. Modest, 1993, "Market Microstructure: An Empirical Retrospective," Preliminary Bibliography, U.C. Berkeley, 9/27.

Marsh, Terry A., and Kevin Rock, 1986, "The Transactions Process and Rational Stock Price Dynamics," Unpublished Working Paper, U.C. Berkeley and Harvard University, October.

Keim, Donald B., and Ananth Madhavan, 1994, "Anatomy of the Trading Process: Empirical Evidence on the Behavior of Institutional Traders," Rodney L. White Center for Financial Research Paper 12-94, May 12.

Cheng, Minder, and Ananth Madhavan, 1994, "In Search of Liquidity: Block Trades in the Upstairs and Downstairs Markets," NYSE Working Paper 94-02, October.

Madhavan, Ananth, and George Sofianos, 1994, "Auction and Dealer Markets: An Empirical Analysis of NYSE Specialist Trading," NYSE Working Paper #94-01, July 29.

Hasbrouck, Joel, 1991, "Measuring the Information Content of Stock Trades," Journal of Finance, 46, 179-207.

Rhee, S. Ghon, and Rosita P. Chang, 1993, "The Microstructure of Asian Equity Markets," Journal of Financial Services Research, 6(4), January, 437-454.

Roell, Ailsa, 1992, "Comparing the Performance of Stock Exchange Trading Systems," Ch. 8 in: J. Fingleton and D. Schoemaker, eds., The Internationalization of Capital Markets and the Regulatory Response, Graham and Trotman, London.

Reiss, Peter C., and Ingrid Werner, 1994, "Transaction Costs in Dealer Markets: Evidence from the London Stock Exchange," Research Paper No. 1289, Graduate School of Business, Stanford University, March 18.

Smith, Tom, 1994, "Econometrics of Financial Models and Market Microstructure Effects," Journal of Financial and Quantitative Analysis, 29(4), December, 519-540.

2.19 Market Microstructure: Estimating the Bid-Ask Spread

Roll, Richard, 1984, "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, 39(4), 1127-1139.

Choi, J.Y., Dan Salandro, and Kuldeep Shastri, 1988, "On the Estimation of Bid-Ask Spreads: Theory and Evidence," Journal of Financial and Quantitative Analysis, 23(2), 219-230.

Stoll, Hans, 1989, "Inferring the Components of the Bid Ask Spread: Theory and Empirical Tests," Journal of Finance, 44, 115-134.

George, Thomas J., Gautam Kaul, and M. Nimalendran, 1991, "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, 4(4), 623-656.

DeJong, Frank, Theo Nijman, and Ailsa Roell, 1996, "Price Effects of Trading and Components of the Bid-Ask Spread on the Paris Bourse," Journal of Empirical Finance, 3, 193-213.

2.20 Financial Structure & Intermediation

Sharpe, William F., 1993, "Nuclear Financial Economics," Research Paper 1275, Graduate School of Business, Stanford University, November.

Gennotte, Gerard, and David Pyle, 1991, "Capital Controls and Bank Risk," Journal of Banking and Finance, 15, 805-824.

Merton, Robert C., and Zvi Bodie, 1992, "A Framework for the Economic Analysis of Deposit Insurance and Other Guarantees," Working Paper #92-063, January.

Miller, Merton H., "Financial Innovation: The Last Twenty Years and the Next," Journal of Financial and Quantitative Analysis, 21, December, 459-471.

Merton, Robert C., "Financial Innovation and Economic Performance," Journal of Applied Corporate Finance, 4, Winter, 12-22.

Miller, Merton H., 1992, "Financial Innovation: Achievements and Prospects," Journal of Applied Corporate Finance, 4, Winter, 4-11.

Ross, Stephen, 1989, "Institutional Markets, Financial Marketing, and Financial Innovation," Journal of Finance, 44(3), July, 541-556.

3. Time Series and Econometric Procedures

3.1 References:

Maddala et. al., Econometrics of Finance, Revised Ed.

Peter Kennedy, A Guide to Econometrics, MIT Press, 4th Ed. ,1998.

Hamilton, James, Time Series Analysis, Princeton University Press, Princeton NJ, 1994.

3.2 Econometric Techniques---GMM

Ferson, Wayne E., 1993, "Theory and Empirical Testing of Asset Pricing Models," forthcoming: Handbooks in Management Science: Finance, ed. by Robert A. Jarrow, Vojislav Maksimovic, and William T. Ziemba, North-Holland, 1995, Section 3.2

Gallant, A. Ronald, and George Tauchen, 1992, "Which Moments to Match," Unpublished Working Paper, Duke University, December.

Back, Kerry, and David P. Brown, 993, Implied Probabilities in GMM Estimators," Econometrica, 61(4), July, 971-975.

MacKinlay, A. Craig, and Matthew P. Richardson, 1991, "Using Generalized Method of Moments to Test Mean-Variance Efficiency," Journal of Finance, 46(2), October/November, 511-527.

Kopp, Raymond J., and John Mullahy, 1990, "Moment-Based Estimation and Testing of Stochastic Frontier Models," Journal of Econometrics, 46(1,2), October/November, 165-183.

Ferson, Wayne, and Stephen R. Foerster, 1994, "Finite Sample Properties of the Generalized Method of Moments in Tests of Conditional Asset Pricing Models, Journal of Financial Economics, 36, 29-55.

3.3 Econometric Techniques---Simulated Method-of-Moments

Gennotte, Gerard, and Terry A. Marsh, 1993, "Variations in Economic Uncertainty and Risk Premiums on Capital Assets," European Economic Review, 37, 1021-1041.

3.4 Econometric Techniques---Nonparametric and Semiparametric Techniques

Barnett, William A., James Powell, and George Tauchen (eds.), Nonparametric and Semiparametric Methods in Econometrics and Statistics, Proceedings of the Fifth International Symposium in Economic Theory and Econometrics, Cambridge, Cambridge University Press.

Robinson, Peter M., 1988, "Semiparametric Econometrics: A Survey," Journal of Applied Econometrics, 3 ( ), 35-51.

Gallant, A. Ronald, and George Tauchen, 1989, "Semi-Nonparametric Estimation of Conditionally Heterogeneous Processes: Asset Pricing Applications," Econometrica, 57, September, 1091-1120.

Meese, Richard, and Nancy Wallace, 1991, "Nonparametric Estimation of Dynamic Hedonic Price Models and the Construction of Residential Housing Price Indices," AREUEA Journal, 19(3), 308-332.

Engle, Robert F., and Gloria Gonzalez-Rivera, 1991, "Semiparametric ARCH Models," Journal of Business & Economic Statistics, 9(4), October, 345-359.

Cheng, Bing, and P.M. Robinson,1994, "Semiparametric Estimation from Time Series with Long-Range Dependencies," Journal of Econometrics, 64(1,2), September/October, 335-353.

Siddique, Akhtar, 1994, "Nonparametric Estimation of Mean and Variance and Pricing of Securities," Unpublished Manuscript, Duke, Fuqua, December.

Frees, Edward W., 1994, "Estimating Densities of Functions of Observations," Journal of the American Statistical Association, 89(426), June, 517-525.

3.5 Time Series Models for Asset Returns--Co-integration, Error Correction Models, and Vector Autoregressions

James D. Hamilton, 1994, Time Series Analysis, Chapter 19.

Watson, Mark W., 1993, "Vector Autoregressions and Cointegration," Unpublished Manuscript, Northwestern University, August 3, forthcoming: Handbook of Econometrics, Vol. 4, eds. Robert F. Engle and Daniel McFadden.


Engle, Robert F., and Byung-Sam Yoo, 1987, "Forecasting and Testing in Cointegrated Systems," Topics in Applied Regression and Time Series Analysis, Supplement to: Journal of Econometrics, 143-159.

Throop, Adrian W., 1994, "International Financial Market Integration and Linkages of national Interest Rates," Economic Review: Federal Reserve Bank of San Francisco, 3, 3-18.