Empirical Asset Pricing - SJTU

Empirical Asset PricingClass 1: Introduction

Jun Pan

Shanghai Advanced Institute of FinanceShanghai Jiao Tong University

November 11, 2019

SAIF 交大高金 Jun Pan 潘军 November 11, 2019 1 / 15

Outline

Course overview: coverage, requirement, and gradingFinance, economy, and societyThe evolution of modern financeThe profession of finance academics

SAIF 交大高金 Jun Pan 潘军 November 11, 2019 2 / 15

Lectures, Exercises, and Assignments

Nov 11

StructuralEstimations

Cross-Sectional

Estimations

Nov 18

Time-VaryingExpected

Return andVolatility

Options

Exercise 1

Nov 25

Fixed Income

Currency

Exercise 2

Hansen Singleton

Dec 2

Credit Market

Banking andFinancial

Crises

Exercise 3

Dec 9

FinancialIntermediaries

BehavioralFinance andHousehold

Finance

Exercise 4

Dec 16

Microstructure

Q & A

Fama French

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Elective Assignments, Two out of Six, Due on Jan 13

StructuralEstimations

Cross-Sectional

Estimations

Time-VaryingExpected

Return andVolatility

Options

Fixed Income

Currency

Credit Market

Banking andFinancial

Crises

FinancialIntermediaries

BehavioralFinance andHousehold

Finance

Microstructure

Bakshi, Cao,and Chen

(1997

Hu, Pan,and Wang

(2013)

Geng andPan (2019)

Hong, Lu,and Pan(2019)

Lucca andMoench(2011)

Bao, Pan,and Wang

(2011)

SAIF 交大高金 Jun Pan 潘军 November 11, 2019 4 / 15

Course Requirements and Grading:

Regular attendance and class participation: 30%.Empirical exercises, 20%: four exercises with 5% each.Mandatory assignments, 30%: two assignments with 15% each.Elective assignments: 20%: two assignments with 10% each.There is no final exam.

SAIF 交大高金 Jun Pan 潘军 November 11, 2019 5 / 15

Paul Krugman, The New York Times, April 10, 2009:

Thirty-plus years ago, when I was a graduate student in economics, only the leastambitious of my classmates sought careers in the financial world...everyone knewthat banking was, well, boring.In the years that followed, of course, banking became anything but boring. Wheelingand dealing flourished, and pay scales in finance shot up, drawing in many of thenation’s best and brightest young people (O.K., I’m not sure about the “best” part).And we were assured that our supersized financial sector was the key to prosperity.Instead, however, finance turned into the monster that ate the world economy.

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The Financial Sector

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The Financial Sector, Relative Wage

Source: Philippon and Reshef (2008)SAIF 交大高金 Jun Pan 潘军 November 11, 2019 8 / 15

Capital Markets in the Economy, US and China

1980 1985 1990 1995 2000 2005 2010 2015 20200

2

4

6

8

10

12

14

16

18

20GDP in USD Trillion

$19.3 T

$12.2 T

GDP USGDP China

1980 1985 1990 1995 2000 2005 2010 2015 20200

20

40

60

80

100

120

140

160

180

200Ratio of Stock to GDP (%)

165%

76%

103%

US (NYSE+NASDAQ+AMEX)China (SH+SZ)China (SH+SZ+HK+US)

1980 1985 1990 1995 2000 2005 2010 2015 20200

50

100

150

200

250Ratio of Bond to GDP (%)

211%

90%

Bond USBond China

1980 1985 1990 1995 2000 2005 2010 2015 20200

5

10

15

20

25

30Ratio of Mutual Fund to Stock + Bond (%)

25%

7%

Mutual Fund USMutual Fund China

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Capital Markets: Bond, Equity, Currency, and Commodities

1980 1990 2000 20100

1000

2000

3000Barclays US Bond Agg

1980 1990 2000 20100

1000

2000

3000S&P 500 Index

1980 1990 2000 201050

100

150

200Dollar Index

1980 1990 2000 20100

5000

10000

15000GS Commodity Index

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Cumulative Returns

1990 1995 2000 2005 2010 20150

1

2

3

4

5

6

7

8

9

BondEquityDollarCommodity

SAIF 交大高金 Jun Pan 潘军 November 11, 2019 11 / 15

Daily Returns (%)

1980 1990 2000 2010-50

0

50

100

150Barclays US Bond Agg

1980 1990 2000 2010-40

-20

0

20S&P 500 Index

1980 1990 2000 2010-5

0

5Dollar Index

1980 1990 2000 2010-20

-10

0

10GS Commodity Index

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Modern Finance: Theory, Practice, and Lessons

1950

1951

1952

1953

1954

195

51

95

61957

1958

19

591960196

11

962

1963

19

64

19

65

19

66

19

67

196

81969

1970 1971 1972 1973 19731974

19

75

19

76

19

77

197

8197

91

980

1981

198219831984

198

519

86

19

87

19

88

19

89

19

90

19

91

19

92

1

993 1994

1995

19

96

19

97

19

97

19

98

19

99

200

02

00

12002

200

320

04 2005200

62007

20

08

20

09

20

10

20

11

20

12

20

13

20

14

2015 2 016

20

17

20

18

20

19

PortfolioTheory

(Markowitz)

Two-FundSeparation

(Tobin)

Investments andCapital Structure(Modigliani and Miller)

CAPM(Sharpe)

Efficient MarketsHypothesis

(Samuelson, Fama)

Mutual FundsStudy (Jensen)

Birth of IndexFunds (McQuown)

Option Pricing Theory(Black, Scholes, Merton)

First US OptionsExchange, CBOE

Index MutualFunds (Bogle)

Rise ofJunk Bonds(MichaelMilken)

MortgageBackedSecurities(FannieMae)

First StockIndex Futures

OTC DerivativesInterestRateSwaps

StockMarketCrash

S&L BailoutCollapse ofJunk Bonds

Large Derivatives Losses

CreditDerivatives(CDS)

FirstTIPS

AsianCrisis

LTCMCrisis

Dot-ComPeak

EnronScandal

WorldComScandal Financial

Crisis

Dodd-Frank

EuropeanSovereignCrisis

ChineseStockMarketCrash

Trump

TradeWar

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What has Mattered to Economics since 1970s?

Source: Kim, Morse, and Zingales (2006)

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What has Mattered to Economics since 1970s?

Source: Kim, Morse, and Zingales (2006)SAIF 交大高金 Jun Pan 潘军 November 11, 2019 15 / 15