McGill University
Ph.D. Course in International Finance - FINE 709
Fall 2011 - Thursdays 10 A.M.- 5 P.M.
September 1st, 15th, 29th and Oct.20th Bronfman Room 503
November 3rd, 17th and 24th Bronfman Room 647
Instructor:
Vihang Errunza
vihang.errunza@mcgill.ca 514-398-4056
Adm. Co-ord.:
Karen Robertson
karen.robertson@mcgill.ca 514-398-8144
Office Hours:
By Appointment
OBJECTIVES
This is an advanced seminar with the following two objectives:
1. Students will understand and synthesize classic literature and recent advances in
International Finance.
2. Students will develop a portfolio of potential theses topics that they could further pursue if
they are so inclined.
This course will be conceptual rather than technical. It will focus exclusively on Finance issues
and not cover issues generally identified with topics in International Economics such as,
Balance of Payments, Theory of Foreign Exchange etc.
COURSE MATERIAL
I will assume that students have had prior exposure to the foundation courses in Financial
Economics and Empirical Finance as well as an MBA equivalent course in International
Finance. Students that did not have a prior course on international finance can refer to, B.
Solnik and D. McLeavey, Global Investments, Sixth edition, Pearson Addison Wesley.
There is no text for this course. The course materials will include a number of academic papers
listed below. Due to the time constraint, I have had to designate some of these papers as
required (R) and others as optional (O) that you may study at your convenience. The breakdown
is not a signal of quality but to maximize the learning experience.
FORMAT
In each class, students will lead the discussion and present their understanding of a set of
papers together with a summary, critique and potential research ideas for further work on the
topic of the papers. A written report including a summary, critique and potential research ideas
for further work on the topic will be expected. The rest of the class will be REQUIRED to come
prepared for substantial discussion. Thus, the seminar will involve a very high degree of student
participation with the learning directly related to the effort put in. Students will choose one of the
topics from among the SIX (not counting those to be covered by the instructor and Burcin Col) in
the
outline
and
hand
in
their
written
report
to
the
instructor
(by
e-mail
at
vihang.errunza@mcgill.ca) and the other participants one week prior to the class session. Thus,
each student will be responsible for their chosen topic. It is expected that students will go in
depth in at least two of the required readings from their chosen topic and their written report will
focus on at least those two papers. You are of course free to review papers that are not listed
on the outline. The allocation of topics will be on first come first served basis. Please let me and
other participants know when you choose a topic so that all are appropriately notified. Although
only one student will be assigned to a topic, if there are more than 6 participants, multiple
students can be assigned to a topic with the instructor’s permission. Most of the papers are
available in print or on the Web. Let me know if you need any of the papers and I will e-mail
them to you. The dates are indicative and will depend on the progress we make in the class.
GRADING
The final grade will consist of the following components:
Class Presentation - 25%
Written Report
- 25%
Class Participation - 25%
Final Assignment
- 25% A short final paper based on an original research idea-theoretical or
empirical. We will discuss your final paper in class.
All student participants MUST register for credit - No auditors will be allowed. Faculty members
will be most welcome. Of course, they will be expected to fully participate in all aspects of the
course.
McGill Honor Code & Charter of Students’ Rights
McGill University values academic integrity.
Therefore, all students must understand the
meaning and consequences of cheating, plagiarism and other academic offences under the
Code of Student Conduct and Disciplinary Procedures (see www.mcgill.ca/students/srr/honest/ for
more information)
In accord with McGill University’s Charter of Students’ Rights, students in this course have the
right to submit in English or in French any written work that is to be graded.
COURSE CONTENT
International Asset Pricing – Theory (Vihang Errunza) Sept. 1
Solnik, B., 1974, “An Equilibrium Model of the International Capital Market”, Journal of
Economic Theory, 8, 500-524. (O)
Stulz, R.M., 1981, “A Model of International Asset Pricing”, Journal of Financial Economics, 9,
383-406. (O)
Stulz, R. M., 1981, “On the Effects of Barriers to International Investment”, Journal of Finance,
36, 923-934. (R)
Adler, M. and B. Dumas, 1983, “International Portfolio Selection and Corporation Finance: A
Synthesis”, Journal of Finance, 38, 925-984. Read only to page 956. (R)
Errunza, V., and E. Losq, 1985, “International Asset Pricing Under Mild Segmentation: Theory
and Test”, Journal of Finance, 40, 105-124. (O)
Eun, Cheol, and S. Janakiramanan, 1986, “A Model of International Asset Pricing with a
Constraint on the Foreign Equity Ownership”, Journal of Finance, 41, 897-914. (O)
Chaieb, I. and V. Errunza, 2007, “International Asset Pricing Under Segmentation and PPP
Deviations”, Journal of Financial Economics, Vol. 86, No.2, Nov. 2007, 543–578. (R)
International Asset Pricing - Tests (Babak Lotfaliei) Sept. 15
Harvey, C. R., 1991, “The World Price of Covariance Risk”, Journal of Finance, 46, 111-157. (R)
Ferson, W.E. and C. Harvey, 1993, “The Risk and Predictability of International Equity Returns”,
Review of Financial Studies, 6, 527-566. (O)
Dumas, B. and B. Solnik, 1995, “The World Price of Foreign Exchange Risk”, Journal of
Finance, 50, 445-479. (R)
De Santis G. and Gerard B., 1998, “How Big is the Premium for Currency Risk?”, Journal of
Financial Economics, 49, 375-412. (R)
Carrieri, F., V. Errunza and B. Majerbi, 2006, “Does Emerging Market Exchange Risk Affect
Global Equity Prices?”, Journal of Financial and Quantitative Analysis, 41, 511-540.(O)
International Market Integration
(Mahsa Nasher) Sept. 15 and 29
Wheatley, Simon, 1988, “Some Tests of International Equity Market Integration”, Journal of
Financial Economics 21, 177-213. (O)
Errunza, V., E. Losq, and P. Padmanabhan, 1992, “Tests of Integration, Mild Segmentation and
Segmentation Hypotheses”, Journal of Banking and Finance, 16, 949-972. (O)
Bekaert, G. and C. Harvey, 1995, “Time-varying World Market Integration”, Journal of Finance,
50, 403-445. (R)
Carrieri, F., V. Errunza and K. Hogan, 2007, “Characterizing World Market Integration Through
Time”, Journal of Financial and Quantitative Analysis, 42, No. 4. (R)
Anthony Chambet & Rajna Gibson, 2008, “Financial Integration, Economic Instability and Trade
Structure in Emerging Markets”, Journal of International Money & Finance, Forthcoming (O)
Pukthuanthong-Le, K., and R., Roll, 2009. Global Market Integration: An Alternative Measure
and Its Application. Journal of Financial Economics 94, 214-232. (O)
Bekaert, G., C. Harvey, C. Lundblad, and S. Siegel, 2011, “What segments equity markets?”,
Forthcoming, Review of Financial Studies. (R)
Carrieri, F., I. Chaieb and V. Errunza, 2011,“Do Implicit Barriers Matter for Globalization?”, W.P.
McGill University. (R)
Correlations and International Diversification
(Amir Akbari) Sept. 29
Longin, F. and B. Solnik, 1995, “Is the Correlation in International Equity Returns Constant:
1960-1990?”, Journal of International Money and Finance, 14, 3-26. (O)
Karolyi A. and R.M. Stulz, 1996, “Why do Markets Move Together? An Investigation of U.S.Japan Stock Return Comovements”, Journal of Finance, 51, 951-986. (O)
De Santis G. and Gerard B. 1997, “International Asset Pricing and Portfolio Diversification with
Time-varying Risk”, Journal of Finance, 52, 1881-1912. (R)
Errunza, V., K. Hogan and M-W. Hung, 1999, “Can the Gains from International Diversification
be Achieved Without Trading Abroad”, Journal of Finance, 54, 2075-2107. (R)
Longin, F., and B. Solnik, 2001, Extreme Correlation of International Equity Markets, Journal of
Finance 56, 649-676. (R)
Forbes, K. and R. Rigobon, 2002, “No Contagion, Only Interdependence: Measuring Stock
Market Comovements”, Journal of Finance, 57, 2223-2261. (O)
Ang, A., and G. Bekaert, 2002, International Asset Allocation with Regime Shifts, Review of
Financial Studies 15, 1137-1187. (O)
Christoffersen, P., V. Errunza, K. Jacobs and H. Langlois, 2011, “Is the Potential for
International Diversification Disappearing?”, W.P. McGill University. (R)
Geographic versus Industrial Diversification
(Hugues Langlois) Oct. 20
Heston, S. and K.G. Rouwenhorst, 1994, “Does Industrial Structure Explain the Benefits of
International Diversification?” Journal of Financial Economics, 36, 3-27. (R)
Griffin, J. and G.A. Karolyi, 1998, “Another Look at the Role of the Industrial Structure of
Markets for International Diversification Strategies”, Journal of Financial Economics, 50,
351-373. (O)
Carrieri, F., V. Errunza and S. Sarkissian, 2003, “Industry Risk and Market Integration”,
Management Science, Vol. 50, February 2004, pp. 207-221.(R)
Ferreira, Miguel and Paolo Gama, 2005, “Have World, Country and Industry Risks Changed
Over Time? An Investigation of the Volatility of Developed Stock Markets,” Journal of
Financial and Quantitative Analysis, 40(1), 195-222. (O)
Baele, L., 2005, “Volatility spillover effects in European equity markets,” Journal of Financial
and Quantitative Analysis, 40(2) 373–401. (O)
Carrieri F., V. Errunza and S. Sarkissian, 2007, “Industrial Structure, Market Integration, and
International Portfolio Diversification”, W.P., McGill University (O)
Bekaert, G., Hodrick, R., and X. Zhang, 2009, International Stock Return Comovements,
Journal of Finance 64, 2591-2626. (O)
International Corporate Finance
(Vihang Errunza) Oct. 20 and Nov.3
Agmon, T. and D. Lessard, 1977, “Investor Recognition of Corporate International
Diversification”, Journal of Finance, 32, 1049-1055. (O)
Errunza, V., and L. Senbet, 1981, “The Effects of International Operations on the Market Value
of the Firm: Theory and Evidence”, Journal of Finance, 36, 401-417. (R)
Bodnar, G., C. Tang, and J. Weintrop, 1997, “Both Sides of Corporate Diversification: The Value
Impacts of Geographic and Industrial Diversification”, Working Paper 6224, NBER (O)
Denis, D., D. Denis, and K. Yost, 2002, “Global Diversification, Industrial Diversification, and
Firm Value”, Journal of Finance, 57, 1951-1979. (R)
Dahlquist, M., L. F. Pinkowitz, R. M. Stulz, and R. Williamson, 2003, Corporate Governance and
the Home Bias, Journal of Financial and Quantitative Analysis 38, 87-110. (R)
Dos Santos, M.B, V. Errunza and D. P. Miller, 2008, Does corporate international diversification
destroy value? Evidence from cross-border mergers and acquisitions, Journal of Banking
and Finance 32, 2716-2724. (O)
Investor Protection and Governance (Burcin Col) Nov.3
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, 2002, Investor Protection and
Corporate Valuation. Journal of Finance 57:1147–70. (O)
Stulz, R., 2005, The limits of financial globalization, Journal of Finance 60, 1595-1638. (R)
Bris, A. and C. Cabolis, 2008, The value of investor protection: firm evidence from cross-border
mergers, Review of Financial Studies 21, 605-648. (R)
Djankov, S., R. La Porta, F. Lopez-de-Silanes, and A. Shleifer, 2008, The law and economics of
self-dealing, Journal of Financial Economics 88, 430-465. (O)
Col, B. and V. Errunza, 2011, “Corporate Governance and State Expropriation Risk”, W.P.,
McGill University. (R)
Market Liberalization, C.O.C., Volatility and Correlation (Feng (Morgan) Jiao) Nov.17
Bekaert, Geert and Campbell Harvey, 1997, “Emerging Equity Market Volatility”, Journal of
Financial Economics, 43, 29-77. (O)
Stulz, R. M., 1999, “Globalization of Equity Markets and the Cost of Capital”, Working Paper,
The Ohio State University. (O)
Bekaert, G. and C. Harvey, 2000, “Foreign Speculators and Emerging Equity Markets”, Journal
of Finance, 55, 565-613. (R)
Henry, P. B., 2000, “Stock Market Liberalization, Economic Reform, and Emerging Market
Equity Prices”, Journal of Finance, 55, 529-564. (R)
Errunza, V. and D. Miller, 2000, “Market Segmentation and the Cost of Capital in International
Equity Markets”, Journal of Financial and Quantitative Analysis, 35, 577-600. (O)
Bae, K.H., W. Bailey and C. X. Mao, 2006. Stock market liberalization and the information
environment, Journal of International Money and Finance 25, 404-428. (O)
Hail, L. and C. Leuz, 2009. Cost of capital effects and changes in growth expectations around
U.S. cross-listings, Journal of Financial Economics, 93, 428-454. (O)
Emerging Markets, Country Funds and ADRs (Rimaa Bhattacharyay) Nov.17
Bekaert, Geert, and Michael Urias, 1996, “Diversification, Integration and Emerging Market
Closed-end Funds”, Journal of Finance, 51, 835-869. (O)
Errunza, Vihang, Lemma Senbet, and Ked Hogan, 1998, “The Pricing of Country Funds from
Emerging Markets: Theory and Evidence”, International Journal of Theoretical and Applied
Finance, 1, 111-143. (R)
Miller, Darius P., 1999, “The Market Reaction to International Cross-listings: Evidence from
Depositary Receipts”, Journal of Financial Economics, 51, 103-123. (O)
Foerster, Stephen R. and G. Andrew Karolyi, 1999, “The Effects of Market Segmentation and
Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the U.S.”,
Journal of Finance, 54, 981-1013. (O)
Sarkissian, S. and M. Schill, 2004, “The Overseas Listing Decision: New Evidence of Proximity
Preference”, Review of Financial Studies, 2004, 17(3), 769-809. (O)
Bailey W., G. A. Karolyi, and C. Salva, 2006. The economic consequences of increased
disclosure: Evidence from international cross-listings, Journal of Financial Economics 81,
175-213. (O)
Doidge, C. , G. Karolyi , K. Lins , D, Miller and R. Stulz, 2009, “Private Benefits of Control,
Ownership, and the Cross-Listing Decision”, Journal of Finance, 64, 425-466. (R)
Final Assignment Presentation Nov.24