Prof. Jimmy Torrez, Ph.D.

Office Hours:


Fall Semester 2017-2018

 

Telephone 764-0000 x-87106

e-mail jimmy.torrez@ upr.edu

Web page: http://jtorrez.uprrp.edu

 

University of Puerto Rico

Río Piedras Campus

Graduate School of Business Administration

 

Syllabus

 

Jimmy Torrez

 

I. Investment Markets, FING 8025

 

II. Course Description.

The most recent research of diverse lines of thoughts on the investment area and the interrelation of those lines with the impact of the investments methods in the domestic, Latin America, and the Caribbean Financial markets will be analyzed.  Also, the theoretical views for analyzing the topic of investment markets under uncertainty within the scope of other disciplines such as microeconomics, macroeconomics and accounting will be discussed.

 

III. The following courses are prerequisites for this course.

Theory of Finance 1 (FING 8005)

 

IV. Weekly Hours and Credits.

Classes meet for two-hours and fifty minutes once a week. This is a 3-credit course.

 

V Course Objectives

This course covers the main tools of investments as well as financial markets. It seeks to give the student the tools to prepare Ph.D. dissertation in this area and to be able to teach courses in investment theory and practice. Students will refine the tools learned in financial theory and financial econometric courses. Students will learn to formulate theoretical models and empirical frameworks to analyze in depth issues related to investments and financial markets. The students will become familiar with dynamic investment theory in short horizons as well as over the life cycle. They will become familiar with variable and fixed income markets, portfolio performance evaluation, and technical analysis. Behavioral finance concepts will be used to examine market behavior and investment strategies.

 

VI. Course Content and Allocation of Time

 

Topics                                                                                                                                      Time

                                                                                                                                    (hours)

  1. Introduction to the course                                                                                          3 hours
  2. Introduction to Unix and SAS                                                                                               6 hours
  3. Review of CAPM, Multifactor Models and Empirical Issues                                    3 hours

1.     Fama and French (1992, 1993, 1996a, 1996b),

2.     Carhart, Mark M. (1997),

 

  1. Logical Problems with Efficient Markets                                                                   6 hours

 

1.           Eugene F. Arthur B. Laffer (1971)

2.          Grossman, Sanford and Joseph Stiglitz (1980)

 

E.  Information, Efficiency and Behavioral Finance                                                              9 hours

  1. Information and efficiency. Reilly and Brown (Chapter 6), Grossman and Stiglitz (1980).
  2. Deviations from efficiency and behavioral finance. Bansal, Dahlquist, and Harvey (2004),
  3. Empirical evidence.  Reilly and Brown (2002, Chapter ), Lee, Shleifer, and Thaler (1991).
  4. Puzzles? Mehra, (2003)

 

F. Investment Performance Evaluation and Technical Analysis                                            9 hours

  1. Technical analysis. Reilly and Brown (2002, Chapters 18, 19), Lo, Mamaysky, and Wang (2000), Delong, Shleifer, Summers, and Waldmann, R., (1990b),
  2. Measuring investment performance. Reilly and Brown (2002, Chapter 20, 25, 26), Carhart, (1997
  3. Arbitrage. Shleifer and Vishny (1997).

 

G. Fixed Income Investment and Markets                                                                             9 hours           

  1. Review of fixed income markets and term structure. Reilly and Brown (2002, Chapters 11, 12 ), Hull (2003, Chapter 5), Cochrane (2001, Chapter 19)
  2. The Heath-Jarrow and Morton and the LIBOR market models. Hull (2003, Chapters 22, 23, 24).
  3. Advances in modeling the term structure of interest rates. Duffie and Kan (1996), Dai and Singleton (2000, 2003), Duffee (2002). 
  4. Credit risk and risk management. Hull (2003, Chapter 16, 26), Duffie and Singleton (2003).

 

VII. Instruction Strategies

 

Classes meet every week for lecturing and discussion purposes. The students are responsible for the articles. Taking full advantage of this course will require at least 10 hours a week of work outside class. A series of exercises will test and extend the themes introduced in class. Students should meet outside class to prepare the group exercises. The exercises’ answer sheet must be prepared individually. Each student should prepare a research paper or a detailed survey paper about a theme in this subject.

 

VIII. Learning Resources

 

Students should have access to a computer and a calculator. Some exercises are numerical and the research paper might require data analysis.

 

The students who receive services from Vocational Rehabilitation (Rehabilitación Vocacional) must communicate with the professor at the beginning of the semester to plan a reasonable arrangement and necessary assisting equipment according to the recommendations of the Office of Handicapped Persons Affairs (Oficina de Asuntos para las Personas con Impedimento, OAPI) of the Dean of Students. Also, those students with special needs that require some type of attendance or arrangement must communicate with the professor.

 

IX. Evaluation Strategies

 

Grading will be based on assignments and exercises (40%), a paper (40%) and one exam (20%).

 

X. Evaluation System

 

Grades will be quantified along the A to F scale.

 

XI. Required Textbooks: None

 

Recommended Textbooks:

 

Bodie, Zvi, Alex Kane and Alan J. Marcus (2005). Investments, 6th edition. Irwin-McGraw-Hill. 

 

Campbell, John Y., Andrew W. Lo and A. Craig MacKinlay (1977). The Econometrics of Financial Markets. Princeton: Princeton University Press.

 

Campbell, John Y. and Luis M. Viceira (2002). Strategic Asset Allocation: Portfolio Choice for Long-Term Investors (Oxford: Clarendon Press).

 

Cochrane, John H. (2001). Asset Pricing (Princeton: Princeton University Press). The “Answers to Problems” is available on reserve. ISBN 0-691-07498-4

 

Duffie, Darrell (2001). Dynamic Asset Pricing Theory, 3rd edition (Princeton: Princeton University Press).

 

Duffie, Darrell and Kenneth Singleton (2003). Credit Risk: Pricing, Measurement and Management (Princeton: Princeton University Press).

 

Gourieroux, Christian and Joann Jasiak (2001). Financial Econometrics: Problems, Models and Methods. Princeton: Princeton University Press.

 

Holden, Craig W. (2004). Excel Modelling in Investments, second edition, Upper Saddle River: Prentice Hall.

 

Hull, John C. (2003). Options, Futures, and other Derivatives, 5th edition, Upper Saddle River, NJ: Prentice Hall.

 

Jackson, Mary and Mike Staunton (2001). Advance Modelling in Finance Using Excel and VBA.  (Chichester and New York John Wiley & Sons).

 

Reilly, Frank K. and Keith C. Brown (2002). Investment Analysis and Portfolio Management, seventh edition, South-Western College Publishing.

 

Siegel, Jeremy J. (2002). Stocks for the Long Run The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, third edition, New York: McGraw-Hill.

 

Shiller, Robert (1989). Market Volatility. Cambridge, MA: MIT Press. Collects pioneering articles on market volatility.

 

Shiller, Robert (2000). Irrational Exuberance. Princeton: Princeton University Press. An excellent account of stock market exuberance.

 

Shleifer, Andrei (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford: Oxford University Press. ISBN 0-19-829227-9

 

Articles:

 

Aggarwal, Raj, Sunil Mohanty, and Frank Song (1995), “Are Survey Forecasts of Macroeconomic Variables Rational?” Journal of Business 68(1): 99-119.

 

Avery, Christopher and Peter Zemesky (1998). “Multidimensional Uncertainty and Herd Behavior in Financial Markets.” American Economic Review 88(4): 724-748.

 

Bansal, Ravi, Magnus Dahlquist, Campbell Harvey (2004), “Dynamic Trading Strategies and Portfolio Choice,” Working Paper W10820, National Bureau of Economic Research, September.

 

Banerjee, Abhijit V. (1992). “A Simple Model of Herd Behavior,” Quarterly Journal of Economics 107(3): 797-817.

 

Barberis, Nicholas, Shleifer, Andrei, and Robert Vishny (1998). "A Model of Investor Sentiment," Journal of Financial Economics 49: 307-343.

 

Barberis, Nicholas, Ming Huang, and Tano Santos (2001). "Prospect Theory and Asset Prices," Quarterly Journal of Economics 116: 1-54.

 

Bekaert, Geert, Claud B. Erb, Campbell R. Harvey, and Tadas E. Viskanta (1998). “Distributional Characteristics of Emerging Market Returns and Asset Allocation,” Journal of Portfolio Management 24(2): 102-116.

 

Berk, Jonathan B. (1999). “A Simple Approach for Deciding When to Invest,” American Economic Review 89(5): 1319-1326.

 

Bikhchandani, Suchil, David Hirshleifer and Ivo Welch (1992). “A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades,” Journal of Political Economy 100(5): 992-1026.

 

Bikhchandani, Suchil, David Hirshleifer and Ivo Welch (1998). “Learning from the Behavior of Others, Conformity, Fads and Informational Cascades,” Journal of Economic Perspectives, 12(3): 151-170.

 

Bollerslev, Tim and Hao Zhou (2005). “Volatility Puzzles: A Simple Framework for Gauging Return-Volatility Regressions,” Journal of Econometrics, forthcoming.

 

Campbell, John Y. (2000). “Asset Pricing at the Millennium,” Journal of Finance, 55(4): 1515-1168.

 

Carhart, Mark M. (1997), “On Persistence in Mutual Fund Performance,” Journal of Finance, 52(1): 57-82.

 

Cascon, A, William F. Shadwick, and  Con Keating, (2001) “Properties of the Omega Measure” Working Paper. The Finance Development Centre, London

 

Chiang, I. H. E. (2015). Modern portfolio management with conditioning information. Journal of Empirical Finance, 33, 114-134.

 

Cochrane, John H. (1997). “Where is the Market Going? Uncertain Facts and Novel Theories,” Economic Perspectives, Federal Reserve Bank of Chicago: 21(6): 3-37. 2. Can be downloaded from various Web addresses and from Professor Cochrane’s Web Page at the University of Chicago Graduate School of Business

 

Cochrane, John H. (1999a). “New Facts in Finance,” Economic Perspectives, Federal Reserve Bank of Chicago: 23(3): 36-58. Can be downloaded from various Web addresses and from Professor Cochrane’s Web Page at the University of Chicago Graduate School of Business

 

Cochrane, John H. (1999b). “Portfolio Advice for a Multifactor World,” Economic Perspectives, Federal Reserve Bank of Chicago: 23(3): 59-78. Can be downloaded from various Web addresses and from Professor Cochrane’s Web Page at the University of Chicago Graduate School of Business.

 

Dai, Qiang and Kenneth J. Singleton (2000). “Specification Analysis of Affine Term Structure Models,” Journal of Finance 55(5): 1943-1978.

 

Dai, Qiang and Kenneth J. Singleton (2003). “Term Structure Dynamics in Theory and Reality,” Review of Financial Studies 16: 631-678.

 

Delong, J. B., Shleifer, A., Summers, L., and Waldmann, R., (1989), “The Size and Incidence of the Losses from Noise Trading.” Journal of Finance, 44:681-696.

 

Delong, J. B., Shleifer, A., Summers, L., and Waldmann, R., (1990a), “Noise Trader Risk in Financial Markets.” Journal of Political Economy, 98:703-738.

 

Delong, J. B., Shleifer, A., Summers, L., and Waldmann, R., (1990b), “Positive Feedback Investment Stratefies and Destabilizing Rational Specultation.” Journal of Finance, 45:375-95.

 

Delong, J. B., Shleifer, A., Summers, L., and Waldmann, R., (1991), “The Survival of Noise Traders in Financial Markets.” Journal of Business, 64:1-19.

 

Dornbusch, Rudiger, Yung Chul Park and Stijn Claessens (2000). ‘‘Contagion: Understanding How It Spreads,’’ World Bank Research Observer, 15(2): 177-197.

 

Duffee, Gregory R. (2002). “Term Premia and Interest Rate Forecasts in Affine Models,” Journal of Finance 57: 405-443.

 

Duffie, J. Darrell and Rui Kan (1996). “A Yield-factor Model of Interest Rates,” Mathematical Finance 6: 379-406.

 

Ehrman, Michael, Marcel Fratzscher, and Roberto Rigobon (2004). “An International Financial Transmission Model.” Mimeo, European Central Bank, October.

 

Fama, Eugene F. and Kenneth R. French (2004). “The Capital Asset Pricing Model: Theory and Evidence,” Journal of Economic Perspectives 18(3): 25-46.

 

Fama, Eugene F. and Kenneth R. French (1996a). “Size and Book-to-Market Factors in Earnings and Returns,” Journal of Finance 50(1): 131-155.

 

Fama, Eugene F. and Kenneth R. French (1996b). “Multifactor Explanations of Asset-pricing Anomalies,” Journal of Finance 51(1): 55-84.

 

Fama, Eugene F. Arthur B. Laffer (1971). “Information and Capital Markets,” Journal of Business,  44(3): 289-298.

 

Forbes, Kristin and Roberto Rigobon (2001). ‘‘Measuring Contagion: Conceptual and Empirical Issues,’’ in Stijn Claessens and Kristin Forbes, editors, International Financial Contagion. Dordrecht: Kluwer Academic Publishers.

 

Forbes, Kristin and Roberto Rigobon (2002). ‘‘No Contagion, Only Interdependence: Measuring Stock Market Co-Movements,’’ Journal of Finance, 57(5), 2223-2261.

 

French, Kenneth R. and James M. Poterba (1991). “Investor Diversification and Equity Markets,” American Economic Review 81(2): 222-226.

 

Grossman, Sanford and Joseph Stiglitz (1980). “On the Impossibility of Informationally Efficient Markets,” American Economic Review 70: 393-408.

 

Han, Y., Zhou, G., & Zhu, Y. (2016). A trend factor: Any economic gains from using information over investment horizons?. Journal of Financial Economics, 122(2), 352-375.

 

Hsu, P. H., Taylor, M. P., & Wang, Z. (2016). Technical trading: Is it still beating the foreign exchange market?. Journal of International Economics, 102, 188-208.

 

Hubbard, R. Glenn (1994). “Investment Under Uncertainty: Keeping One’s Options Open,” Journal of Economic Literature 32(4): 1816-1831.

 

Jagannathan, Ravi and Ellen R. McGrattan (1995). “The CAPM Debate,” Federal Reserve Bank of Minneapolis Quarterly Review 19(4), Fall: 2-17.

 

Kushner, J. (2017). Two Types of Factors: A Return Decomposition for Factor Portfolios. The Journal of Portfolio Management, 43(4), 17-32.

 

Lee, C.M., Shleifer, A., and Thaler, R. (1991). “Investor Sentiment and the Closed End Fund Puzzle,” Journal of Finance, 46:75-110.

 

Lo, Andrew W. (1999). “The Three P’s of Total Risk Management.” Financial Analyst’s Journal  (January-February): 13-26.

 

Lo, Andrew W., Harry Mamaysky, and Jiang Wang (2000). “The Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation,” Journal of Finance 55: 1705-1765.

 

Kazemi, Hossein, Thomas Schneeweis, Raj Gupta, (2003) “Omega as a Performance Measure,” Working Paper, Center for International Securities and Derivative Markets.

 

Mehra, Rajnish (2003) “The Equity Premium: Why Is It a Puzzle?” Financial Analysts Journal (January-February): 54-69.

 

Perold, André (2004). “The Capital Asset Pricing Model,” Journal of Economic Perspectives 18(3): 3-24.

 

Pericoli, Marcello and Massimo Sbracia (2003). “A Primer on Financial Contagion,” Journal of Economic Surveys, 17(4), 571-608.

 

Shadwick, William F. and  Con Keating (2002) “A Universal Performance Measure” The Journal of Perfomance Measurement, Spring: 59-84.

 

Shiller, Robert (1995). “Conversation, Information, and Herd Behavior,” American Economic Review 85: 181-185.

 

Shleifer, Andrei and Robert W. Vishny (1997). “The Limits of Arbitrage,” Journal of Finance 52 (1): 35-55.

 

Welch, Ivo (1992). “Sequential Sales, Learning, and Cascades”, Journal of Finance 47(2): 695-732.

 

Wermers, Russ (1999). “Mutual Fund Herding and the Impact on Stock Prices,” Journal of Finance 54(2): 581-622.

 

Zingales, Luigi, (2000). “In Search of New Fundamentals,” Journal of Finance 55(4): 1623-1653.