Investment Management
2005 Fall

Tuesday 2:20-5:20 Room 202 COM B2
Dr. Yong-chern Su
Room1004 COM B2 33661089

Course Objectives
1. To introduce the modern investment management theory, including Fisher separation theory, utility theory, portfolio theory, CAPM, APT, option pricing theory, futures, and bond management.
2. To discuss important papers on investment management, including CAPM, APT, efficient market hypothesis, information asymmetry and market microstructure, option pricing and risk management, bond management and international capital market.

Class Structure
The class notes, required textbooks, and assigned papers are the foundation of this course.

Exams
A comprehensive examination and a paper review are required in this class. Class participation is, among other things, a very important factor in your final grading.

Required Textbook
Financial Theory and Corporate Policy, by T. E. Copeland, J. F. Weston, and K. Shastri, 4th edition, 2005, Pearson Addison Wesley publishing company.

Reference Books
1. Modern investment theory, by Robert A. Haugen, the fifth edition, 2001, Prentice Hall.
2. Investment, by Z. Bodie, A. Kane and A.J. Marcus, the fifth edition, 2002, McGraw Hill Irwin.

Office Hours
Scheduled office hours:
Friday: 14:00~15:00
or by appointment.

Assigned Papers
Issue 1: CAPM
1. Fama, E.F. and K. R. French, 1992, The cross-section of expected stock returns, Journal of Finance 47,427-466.
2. Fama, E.F. and K.R. French, 1996, Multifactor explanations of asset pricing anomalies, Journal of Finance 51, 55-84. (P)
3. Fama, E.F. and J. MacBeth, 1973, Risk, return and equilibrium: empirical tests, Journal of Political Economy 81, 607-636.
4. Banz, R.W., 1981, The relationships between return and market value of common stocks, Journal of Financial Economics 9, 3-18.
5. Basu, S., 1983, The relationship between earnings yield, market value and return for NYSE common stocks: further evidence, Journal of Financial Economics 12, 129-156.
6. Keim, D. B., 1983, Size-related anomalies and stock return seasonality, Journal of Financial economics 12, 13-32.
Issue 2: APT
1. Chen, N. F, Roll, R. and S. A. Ross, 1986, Economic forces and stock market, Journal of Business 59, 383-403.
2. Chen, N.F., 1983, Some empirical tests of the theory of arbitrage pricing, Journal of Finance 38, 1393-1413.
3. Connor, G. and R. Korajczyk, 1988, Risk and return in an equilibrium APT: application of a new test methodology, Journal of Financial Economics 21, 255-290.
4. Connor, G. and R. Korajczyk, 1993, A test for number of factors in an approximate factor model, Journal of Finance 48, 1263-1291. (P)
Issue 3: Efficient market hypothesis
1. DeBondt, W.F. and R.H. Thaler, 1987, Does the stock market overreact, Journal of Finance 40, 793-805. (P)
2. Jagadeesh, N. and S. Titman, 1993, Returns to buying winners and selling losers: implications for stock market efficiency, Journal of Finance 48, 65-91. (P)
3. Lo, A. W. and A. C. MacKinlay, 1988, Stock market prices do not follow random walks: evidence from a simple specification test, Review of Financial Studies 1, 41-66.
Issue 4: Information asymmetry and Market microstructure
1. Llornete, G., Michaely, R., Saar, G. and Jiang Wang, 2002, Dynamic volume-return relation of individual socks, Review of Financial Studies 15, 1005-1048.(P)
2. Chordia, T., R. Roll. And A. Subrahmanyam, 2002, Order imbalance, liquidity, and market returns, Journal of Financial Economics 65, 111-130.
3. Brennan, M.J., Chordia, T. and A. Subrahmanyam, 1998, Alternative factor specifications, security characteristics, and the cross-section of expected stock returns, Journal of Financial Economics 49, 345-374.
4. Chordia, T. and A. Subrahmamyam, 2004, Order imbalance and individual stock returns: theory and evidence, Journal of Financial Economics 72, 485-518. (P)
Issue 5: Option pricing and Risk management
1. Heston, S. L. and S. Nandi, 2000, A close-form GARCH option valuation model, Review of financial studies 13, 585-626. (P)
2. Ritchken, P. and R. Trevor, 1999, Pricing options under generalized GARCH and stochastic volatility processes, Journal of Finance 54, 377-402.
3. Berkowitz, J. and J. O’brien, 2002, How accurate are Value-at-Risk models at commercial banks? Journal of Finance 57, 1093-1113. (P)
Issue 6: Bond Management
1. Cox, J., Ingersoll, J. and S. Ross, 1985, A theory of the term structure of interest rates, Econometrica 53, 385-407. (P)
2. Vasicek, O., 1977, An equilibrium characterization of the term structure, journal of financial economics 5, 177-188.
Issue 7: International Capital Market
1. Hamao, Y., Masulis, R. W. and V. K. Ng, 1990, Correlations in price changes and volatility across international stock markets, Review of Financial Studies 3, 281-307.(P)
2. Forbes, K. J. and R. Rigobon, 2002, No contagion, only interdependence: measuring stock market comovements, Journal of Finance 57, 2223-2262.(P)
3. Kodres, L.E. and M. Pritsher, 2002, A rational expectations model of financial contagion, Journal of finance 57, 769-800.









Week Topics and References
1 Introduction
2 Holiday
3 Fisher Separation Theorem
CWS chapter1
4 Fisher Separation Theorem
5 Prospect theory, Expected utility theory and Mean-variance analysis
CWS chapter 3, 5, BKM Chapter 6-8, Haugen, Chapter 5, and Kahneman, D.K. and A. Tversky, 1979, Prospect Theory: an analysis of decision under risk, Econometrica 47, 263-291.
6 Prospect theory, Expected utility theory and Mean-variance analysis
7 CAPM and APT
CWS chapter 6, BKM Chapter 9-13, Haugen Chapter 8-10
8 CAPM and APT
9 Final Exam
10 Options, Futures and Risk management
CWS chapter 7,8, BKM Chapter 20-23, Haugen Chapter 17-20
11 Options, Futures and Risk management
12 Bond Management
BKM Chapter 14,15,16, Haugen Chapter14-16
13 Discussion: CAPM, APT
14 Discussion: Efficient market hypothesis
15 Discussion: Information asymmetry and market microstructure
16 Discussion: Option pricing and Risk management
17 Discussion: Bond management, International capital market
18 Report Due