Economics 487
Applied Financial Modeling

Fall 2005, MW 2:30-4:00, Louderman 461

James Morley, Assistant Professor of Economics
Office Hours: W 1:00-2:30, McMillan 243
Tel: (314) 935-4437
Email: morley@wustl.edu

TA: Pao-Lin Tien
Office Hours: T 10:30-12:00, McMillan 346
Email: ptien@artsci.wustl.edu

PDF of Syllabus

Homework

Project
(Details of the Proposal and Final Project are posted as a pdf here.)

Midterm #1 Practice Questions

Important Dates

• The first exam will be on Monday, October 17
• The Project Proposal is due on Monday, November 7
• The second exam will be on Monday, November 21
• The Final Project is due on Monday, December 12 (last day of classes)

COURSE DESCRIPTION

This course covers major topics in financial economics, including portfolio theory, the capital asset pricing model, the efficient markets hypothesis, and models of time-varying market volatility, with an emphasis on empirical applications of theoretical concepts using Microsoft Excel. Cultivation of practical programming skills is designed to complement application of economic theory to financial markets.
 

PREREQUISITES

The only formal prerequisite is Econ 401 (Price Theory), but it is helpful to have some familiarity with introductory statistics, calculus, and matrix algebra. Familiarity with computers and spreadsheets (such as Microsoft Excel) is also helpful. However, note that, in spite of the "applied" nature of the course, Econ 413 (Intro to Econometrics) is not an official prerequisite.
 

REQUIREMENTS

There will be a number of short homework assignments (posted on the class website listed above), two midterm exams, and a project (proposal and final project). The weights in determining the course grade are given as follows:

     Homework Assignments       30%
     Exams                                    40%
     Project Proposal                    10%
     Final Project                          20%

Late homework will be accepted with a penalty of 20% per 24 hour time period (from the start of the class when the assignment was due). Also, there will be no make-up exams. If you do not show up for an exam, you will receive a score of zero. The only exception will be for a documented medical illness or family emergency. If this should happen, contact me prior to the exam by phone (935-4437) or by email. Note that booking a flight to leave St. Louis before an exam does not constitute a serious emergency.

I will try to be prompt in returning homework and exams. I will also be as careful as possible in assigning grades. However, if you believe a grading mistake has been made, you may submit a written request for a re-grade, carefully explaining why you believe a mistake has been made. Be forewarned, however, that your grade may go up or down as a result of a re-grade.

The letter grade for the course will be determined by converting your percentage score according to the following letter grade distribution:
 

     A+   91-100%  B+   77-79% C+   67-69% D+   57-59% F      0-49%
     A     86-90%    B     73-76% C     63-66%  D     53-56%
     A-    80-85%    B-    70-72% C-    60-62%  D-    50-52%
 

READINGS

There is a required readings package (RP) available for purchase from the main office of the Economics Department (Eliot 205). The package includes materials from a manuscript by Professor Eric Zivot, which will serve as the main text for the course.

Also required is A Random Walk Down Wall Street, by Burton G. Malkiel, Norton, 1999, which is available for purchase in the campus bookstore. This book is a highly readable introduction to financial economics. The purpose of this book is to provide a big picture perspective of the material covered in the course. You will be asked to discuss this text in the homework and on the exams.
 

TOPICS

1. Asset Return Calculations

• Zivot, Chapter 1. RP

• Zivot, Chapter 2. RP

• Zivot, Chapter 3. RP

• Zivot, Chapters 4, 5, and Appendix. RP

• Zivot, Chapter 6. RP

• Zivot, Chapter 7. RP
• Perold, A.F., 2004, “The Capital Asset Pricing Model,” Journal of Economic Perspectives 18, 3-24. RP
• Fama, E.F. and K.R. French, 2004, “The Capital Asset Pricing Model: Theory and Evidence,” Journal of Economic Perspectives 18, 25-46.

Engle, R., 2004, “Risk and Volatility: Econometric Models and Financial Practice,” American Economic Review 94, 405-420. RP

Campbell, J.Y., M. Lettau, B.G. Malkiel, Y. Xu, 2000, “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk” NBER Working Paper 7590. RP

Christoffersen, P.F. and F.X. Diebold, 2005, “Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics,” Manuscript.

Kim, C.-J., J.C. Morley, and C.R. Nelson, 2004, “Is There Positive Relationship between Stock Market Volatility and the Equity Premium,” Journal of Money, Credit, and Banking 36, 339-360. RP

• Malkiel, B.G., 2003, “The Efficient Market Hypothesis and Its Critics,” Journal of Economic Perspectives 17, 59-82.
• Campbell, J.Y. and T. Vuolteenaho, 2004, “Bad Beta, Good Beta,” American Economic Review 94, 1249-1275.
• Campbell, S.D., and F.X. Diebold, “Stock Returns and Expected Business Conditions: Half a Century of Direct Evidence” Manuscript.
• Guidolin, M. and A. Timmermann, 2005, “International Allocation under Regime Switching, Skew and Kurtosis Preferences,” Manuscript.