International financial markets
PROF. FRANTZ PASCAL RENÉ
COURSE AIMS
This course is a course about characteristics of financial markets and optimal
investment strategies with a strong focus on asset pricing, active portfolio
management and risk immunization, portfolio performance evaluation, the
predictability of returns through fundamental and technical analysis, and
behavioral finance. Its aim is to provide a thorough understanding of both market
finance and operations of financial markets, focusing on equity and bond markets.
COURSE CONTENT
The topics covered in this course include:
Single-factor and multi-factor models.
Optimal portfolio selection (asset allocation and security selection).
Optimal investment strategy when privately informed.
Return-based trading strategies and algorithmic (program) trading.
Risk and portfolio performance evaluation.
Historical performance of mutual funds and hedge funds.
Anatomy of a market abnomaly.
Organization of financial markets and exchanges.
Determinants of bid-ask spreads.
Implications of market microstructure for trading.
Returns to technical analysis.
Behavioral finance;
The term structure of interest rates and bond portfolio management;
Risk management: portfolio insurance, portfolio immunization, and value-at-risk.
Lecture 1: Optimal Portfolio Selection
Introduction to the course.
The Markowitz portfolio selection problem.
Asset allocation.
Security selection.
The power of diversification.
Lecture 2: Single-Factor and Multi-Factor Models
Single-factor models.
Multi-factor models.
Lecture 3: Measuring Equity Portfolio Performance
Measuring Portfolio Returns.
Some Common Performance Measures; Sharpe, Treynor, Jensen and M 2.
Measuring market timing ability;
Lecture 4: Active Portfolio Management
Historical performance of mutual funds and hedge funds.
Optimal investment strategy when privately informed.
Return-based trading strategies and algorithmic (program) trading.
Lecture 5: Anatomy of a Market Anomaly
Implications of accruals and cash-flows components of current earnings for future
earnings [Sloan (1996)].
Evidence on subsequent weakening of the returns on Sloan’s hedge portfolio
[Green, Hand and Soliman (2011)].
Role of hedge funds in the weakening of the returns on Sloan’s hedge portfolio
[Hazfalla, Lundholm, and Van Winkle (2011)].
Revival of the accruals anomaly.
Behavioural Finance
Readings:
Green, J.M., J.R. Hand and M.T. Soliman ‘Going, Going, Gone? The Apparent
Demise of the Accruals Abnomaly’, Management Science (57) 2011, pp. 797-816.
Hazfalla, N., R. Lundholm, and E.M. Van Winkle ‘Percent Accruals’, Accounting
Review (86) 2011, pp. 209-236.
Sloan, R. (1996) “Do Stock Prices Fully Reflect Information in Accruals and Cash
flows about Future Earnings?”, Accounting Review.
Lecture 6: Efficient Markets and History Dependent Trading Strategies
Weak-form efficiency.
The random walk model.
Tests of return autocorrelation.
Returns to momentum strategies.
Returns to contrarian strategies.
Readings:
N. Jegadeesh and S. Titman (1993) “Returns to Buying Winners and Selling
Losers: Implications for Stock Market Efficiency”, Journal of Finance, 48, 65-91;
Lecture 7: The Term Structure of Interest Rates and Bond Portfolio Management
Yield Curves, Forward Rates and Holding Period Returns under Certainty;
Term Structure Analysis under Uncertainty;
Bond Portfolio Management and Immunisation
Lecture 8: Market Microstructure
Microstructure concepts.
The cost of immediacy.
Inventory control and dealer behaviour.
Asymmetric information models and quotes and prices.
Implications of market microstructure for serial correlation in returns.
Implications of market microstructure for trading.
Readings:
Chapter 3 [ Investments (Bodie, Kane and Marcus)]
Chapter 1 [Market Microstructure Theory (O’Hara)]
H. Stoll (1978) “The Supply of Dealer Services in Securities Markets”, Journal of
Finance, 33, 13-1151.
A. Kyle (1985) “Continuous Auctions and Insider Trading“, Econometrica, 53,
1315-1336.
L. Glosten and P. Milgrom (1985) “Bid, Ask and Transaction Prices in a Specialist
Market with Heterogeneously Informed Traders“, Journal of Financial Economics,
13, 71-100.
Lecture 9: Risk management
Portfolio insurance.
Portfolio immunization.
Value-at-risk.
READING LIST
Modern Portfolio Theory and Investment Analysis: International Student Version by Edwin
J. Elton, Martin J. Gruber, Stephen J. Brown and William N. Goetzmann (March 2010).
TEACHING METHOD
Lectures.
ASSESSMENT METHOD
Final Exam.