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Economics 46: Topics in Finance
Spring 2005
Professor Bruce Sacerdote
Dartmouth College
Department of Economics
315 Rockefeller, 646 -2121
Office Hours are Fridays and Wednesdays, 3:30 to 5:30
Throughout Spring Term, I am at your disposal to help you find a paper topic, to help you
throughout the research process, or to offer economics related help in general. In particular, your
paper topic must be approved by me.
About the Course
Econ 46 is a seminar course and hence will have a very different structure than many of the other
economics courses which you have taken. The emphasis of the course is on student presentations,
in class discussions, and research, rather than on lectures.
The main goals are 1.) To have you read, understand and present some of the modern finance
literature. 2.) To create your own original piece of research using finance data. 3.) To give you
some knowledge, perspective, and skills that may help you in a job search, grad school, or postDartmouth life.
Readings
The readings will be available through two sources including a.) Blackboard and b.) web based
downloads directly from journals where Dartmouth has permission. (URLs are below).
Requirements and Grading
(30%) At least one in class presentation of one of the assigned papers. Most of you will do two
presentations. I will provide a standard format and guidelines. Students should meet with me
several days prior to the presentation.
(30%) Each day that a paper is being presented you must hand in three answers and one question
on the assigned paper. (1. What hypothesis is tested?, 2. What's the data set?, 3. What's the main
regression being run?, and 4. a question you have about the paper.) You also need to hand in the
mini Stata assignment on Friday April 8th. The questions, the assignment plus general class
contributions will count for 30% of the grade.
(40%) Paper proposal and final research project. The proposal is due on Friday, April 22. The
proposal should detail a.) what data set you have in your possession and b.) what you plan to do
with it. The paper is due on Friday, May 27 (it can be submitted earlier). Hence your work on
this paper will not conflict with your final exams. The last two classes will be used for students
to present their work in class. Papers may be re-written and re-submitted up until Sunday June
5. The paper has a maximum length of 15 pages of text plus tables.
Econ 46, Page 1
Honor Principle
Students must observe the College Honor Principle and in particular are responsible for correct
attribution of sources. If you are using any data or information compiled by another person for
Econ 46 or for another class, you must obtain my permission and cite the other work
appropriately. Similar rules apply to using your own work from a different class or research
project.
Equal Access
Students with disabilities, including “invisible” disabilities like chronic illnesses, learning
disabilities, and psychiatric disabilities, who may need disability-related classroom
accommodations are encouraged to see me as soon as possible.
Bold Papers Are Required Reading. The other papers are listed to give you more depth on a
given topic. This is particularly useful if your research will be on this topic.
Wednesday, 3/30
Intro, ground rules, recent market trends, schedule presentations
maybe Prof Sacerdote presents:
Chevalier, Judith; Ellison, Glenn "Are Some Mutual Fund Managers Better Than Others? CrossSectional Patterns in Behavior and Performance," Journal of Finance; v54 n3 June 1999, pp.
875-99.
link to table of contents OR link to pdf
Stock Market Predictability: Momentum, Under and Over-Reaction
Friday 4/1
Prof. Sacerdote presents:
Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny, "Contrarian Investment,
Extrapolation, and Risk" Journal of Finance, Vol. XLIX, No. 5, December 1994, 1541-1577.
link to pdf
Cochrane, John H. “New Facts in Finance,” National Bureau of Economic Research Working
Paper No. 7169, June 1999. [http://nberws.nber.org/papers/W7169]
Fama, Eugene F. and Kenneth R. French, "The Cross Section of Expected Stock Returns"
Journal of Finance, 47, June 1992, 427-465.
Monday, 4/4
Chan, Louis K.C., Jegadeesh Narasimhan, and Josef Lakonishok, "Momentum Strategies"
Journal of Finance, Vol LI, No. 5, December 1996, 1681-1713.
link to article OR link to pdf
Econ 46, Page 2
Shiller, Robert J., "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in
Dividends?" American Economic Review, Vol 71, No. 3, June 1981,421-435.
De Bondt, Werner F.M., and Richard H. Thaler, "Does the Stock Market Overreact?" Journal of
Finance, Vol. XL, No. 3, July 1986, 793-807.
Wednesday, 4/6
Fama, Eugene F. and Kenneth R. French, "Value Versus Growth: The International Evidence,"
Journal of Finance, Vol 53, No. 6, December 1998.
link to article OR link to pdf
Lakonishok, Josef, Louis K.C. Chan, and Narasimhan Jegadeesh, "Evaluating the Performance
of Value Versus Glamour Stocks: The Impact of Selection Bias," Journal of Financial
Economics, Vol. 38, 1995.
La Porta, Rafael, "Expectations and the Cross Section of Stock Returns" Journal of Finance, Vol
LI, No. 5, December 1996.
Chopra, Navin, Josef Lakonishok and Jay R. Ritter, "Measuring Abnormal Performance" Journal
of Financial Economics, 31 (1992) 235-268.
Poterba, James and Lawrence H. Summers, "Mean Reversion in Stock Prices" Journal of
Financial Economics, 22 (1988), 27-59.
Friday, 4/8
STATA ASSIGNMENT DUE
Hong, Harrison, Terence Lim and Jeremy C. Stein, “Bad News Travels Slowly:
Size, Analyst Coverage, and the Profitability of Momentum Strategies,” Journal of Finance 55,
(2000), 265-295.
link to pdf
Monday, 4/11
Overview of Data on WWW and in Feldberg (meet in normal room)
Wednesday, 4/13
Fong Wai Mun, and Lawrence H.M. Yong, "Chasing Trends: Recursive Moving Average
Trading Rules And Internet Stocks," Journal of Empirical Finance 12 (2005) 43– 76
link to pdf
Risk-Arb and Hedge Funds
Friday, 4/15
Mitchell, Mark, and Todd Pulvino, "Characteristics of Risk and Return in Risk Arbitrage"
Journal of Finance, LVI, No. 6 (Dec 2001), pp. 2135
link to table of contents link to pdf
Econ 46, Page 3
Monday, 4/18
Capocci, Daniel and Georges Hubner, "Analysis of Hedge Fund Performance," Journal of
Empirical Finance, vol. 11, no. 1, January 2004, pp. 55-89.
link to article
Wednesday, 4/20
Harri,. A. And B. W. Brorsen "Performance Persistence And The Source Of
Returns For Hedge Funds," Applied Financial Economics, 2004, 14, 131–141.
link to pdf
Studies of Investor Behavior
Friday, 4/22
PAPER PROPOSAL DUE
Dennis, Patrick J. and Deon Strickland, “Who Blinks in Volatile Markets, Individuals or
Institutions?,” Journal of Finance, Vol LVII, No. 5, October 2002, 1923-.
link to table of contents
Monday, 4/25
Haigh Michael S. And John A. List, "Do Professional Traders Exhibit Myopic Loss Aversion?
An Experimental Analysis" The Journal Of Finance • Vol. Lx, No. 1 • February 2005
link to table of contents
Gneezy, Uri and Jan Potters, "An Experiment on Risk Taking and Evaluation Periods" Quarterly
Journal of Economics, May 1997, 632-645.
Kahneman, Daniel and Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk,"
Econometrica 1979.
Wednesday 4/27
Odean, Terrance, "Are Investors Reluctant To Realize Their Losses," Journal of Finance , Vol.
53, No. 5,(October 1998).
link to table of contents link to pdf
Benartzi, Shlomo and Richard H. Thaler, "Myopic Loss Aversion and the Equity Premium
Puzzle" Quarterly Journal of Economics, February 1995, 73-92.
Friday 4/29
Barber, Brad and Terreance Odean, "Trading is Hazardous to Your Wealth: The Common
Stock Investment Performance of Individual Investors," Journal of Finance, April 2000.
link to table of contents link to pdf
Econ 46, Page 4
Daniel, Kent, David Hirshleifer, and Avandidhar Subrahmanyam, "A Theory of OverConfidence, Self-Attribution, and Security Market Under and Over Reactions," Journal of
Finance 53, December 1998.
Mutual Fund Performance and Money Management
Monday, 5/2
PAPER PROPOSAL DUE
Carhart, Mark M. "On Persistence in Mutual Fund Performance," Journal of Finance, Vol. 52,
No. 1 (March1997): 57-82. [http://www.jstor.org]
direct link to pdf file
link to article
Hendricks, Darryll; Patel, Jayendu; Zeckhauser, Richard "Hot Hands in Mutual Funds: ShortRun Persistence of Relative Performance, 1974-1988," Journal of Finance; v48 n1 March 1993,
pp. 93-130.
Daniel, Kent, Mark Grinblatt, Sheridan Titman, and Russ Wermers, "Measuring Mutual Fund
Performance with Characteristic-Based Benchmarks" Journal of Finance, Vol. LII, No. 3, July
1997, 1035-1058.
Wednesday, 5/4
Wermers, Russ, "Mutual Fund Performance: An Empirical Investigation into Stock Picking
Talent, Style, Transactions Costs, and Expenses," Journal of Finance, Vol LV, No. 4 (August
2000), pp. 1655-1695.
link to table of contents link to pdf
Bergstresser, Daniel and James Poterba, "Do After-Tax Returns Affect Mutual Fund Inflows,"
National Bureau of Economic Research Working Paper #7595, March 2000.
Grinblatt, Mark, Sheridan Titman, and Russ Wermers, "Momentum Investment Strategies,
Portfolio Performance,and Herding: A Study of Mutual Fund Behavior," American Economic
Review, Vol. 85, No. 5 (December1995): 1088-1105.
Ellison, Glenn and Judith Chevalier, "Risk Taking by Mutual Funds as a Response to Incentives"
Journal of Political Economy, Vol. 105, No. 6, 1167-1199.
Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny, "The Structure and Performance of
the Money Management Industry" Brookings Papers on Economic Activity 1992, 339-391.
Gompers, Paul A. and Andrew Metrick, "Are Hundred-Million- Dollar Managers Just Like
Everyone Else? An Analysis of the Stock Ownership of Large Institutions" Mimeograph.
Econ 46, Page 5
Friday, 5/6
Session on STATA and data sets (meet in normal room)
Monday, 5/9
Sapp, Travis, and Ashish Tiwari, "Does Stock Return Momentum Explain the "Smart Money"
Effect?," Journal of Finance, LIX (December 2004), 2605-2622.
link to article
Those Horrible Analysts
Wednesday, 5/11
Hong, Harrison and Jeffrey Kubik, "Analyzing the Analysts: Career Concerns and Biased
Earnings Forecasts," Journal of Finance, LVIII, No. 1, (February 2003), 313-351.
link to table of contents
Friday, 5/13
Womack, Kent, "Do Brokerage Analysts' Recommendations Have Investment Value?," Journal
of Finance, LI (1996), 137-167.
link to article OR use direct link to pdf file
Internal versus External Finance
Monday, 5/16
La Porta, Rafael, Florencio Lopez-De-Silanes, Andrei Shleifer, and Robert W. Vishny, "Legal
Determinants of External Finance" Journal of Finance, Vol. LII, No. 3, July 1997,1131-1150
direct link to pdf file OR use link to article
Fazzari, Steven M., R. Glenn Hubbard and Bruce C. Petersen, "Financing Constraints and
Corporate Investment" Brookings Papers on Economic Activity, No. 1, 1988, 141-206.
Kaplan, Steven N. and Luigi Zingales, "Do Investment-Cash Flow Sensitivities Provide Useful
Measures of Financing Constraints?" Quarterly Journal of Economics, February 1997.
La Porta, Rafael, Florencio Lopez-De-Silanes, Andrei Shleifer, and Robert W. Vishny, "Law and
Finance" Journal of Political Economy, December 1998.
Rajan, Raghuram and Luigi Zingales, 1995, "What Do We Know About Capital Structure? Some
Evidence From International Data," Journal of Finance 50, 1421-1460.
Shleifer, Andrei and Robert Vishny, 1997, A Survey of Corporate Governance, Journal of
Finance 52, 737-783.
Econ 46, Page 6
Management Incentives and Behavior
Wednesday, 5/18
Moeller, Sara B., Frederik Schlingemann and Rene M. Stulz, “Do Shareholders of Acquiring
Firms Gain from Acquisitions?” National Bureau of Economic Research, Working Paper No.
9523, February 2003.
link to article
Morck, Randall, Andrei Shleifer, and Robert W. Vishny, "Do Managerial Objectives Drive Bad
Acquisitions?" Journal of Finance, Vol. XLV, No. 1, March 1990, 31-48.
NOT REQUIRED BUT GOOD direct link to pdf file
OR use link to article
Kaplan, Steven, "The Effects of Management Buyouts on Operating Performance and Value"
Journal of Financial Economics, (24), 1989, 217-254.
Aggarwal, Rajesh K. and Andrew A. Samwick. "Empire Builders and Shirkers: Investment, Firm
Performance,and Managerial Incentives," National Bureau of Economic Research, Working
Paper No. 7335, September1999. [http://nberws.nber.org/papers/W7335]
Maksimovic, Vojislav and Gordon Phillips, "The Market for Corporate Assets: Who Engages in
Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, Vol. LVI, No. 6
(December 2001), pp. 2019-2065.
Schoar, Antoinette, “Effects of Corporate Diversification on Productivity,” Journal of Finance,
Vol. LVII, No. 6 (December 2002), pp. 2379-2403.
Gompers, Paul A., Joy L. Ishii and Andrew Metrick, “Corporate Governance and Equity Prices,”
Quarterly Journal of Economics, Vol. 118, No. 1 (February 2003), pp. 107-155.
Studies of Investment Bank Behavior, IPO Pricing and VC Behavior
Friday 5/20
Ritter, Jay and Ivo Welch, "A Review of IPO Activity, Pricing, and Allocations,"
Journal of Finance, Vol. LVII, No. 4 (August 2002), pp. 1795-1828.
link to table of contents
Brav Alon and Paul Gompers, "Myth or Reality? The Long-Run Underperformance of Initial
Public Offerings: Evidence from Venture and Nonventure Capital Backed Companies," Journal
of Finance, December 1997.
NOT REQUIRED BUT GOOD direct link to pdf file
OR use
link to article
Monday, 5/23
Bradley, Daniel J., Bradford Jordan and Jay R. Ritter, “The Quiet Period Goes Out with a Bang,
Journal of Finance, Vol. LVIII, No. 1 (February 2003), pp. 1-35.
link to table of contents
Econ 46, Page 7
Cornelli, Francesca and David Goldreich, "Bookbuilding and Strategic Allocation," Journal of
Finance, Vol LVI, No. 6 (December 2001), pp. 2337-2369.
Rock, Kevin, "Why Are New Issues Underpriced?" Journal of Financial Economics, 1986.
Jensen, Michael C. and Kevin J. Murphy, "Performance Pay and Top-Management Incentives"
Journal of Political Economy, Vol. 98, No. 2, 1990, 225-264.
Market Volatility
Wednesday, 5/25
Campbell, John Y., Martin Lettau, Burton G. Malkiel & Yexiao Xu, "Have Individual Stocks
Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," The Journal of
Finance, Volume 56, Issue 1, February 2001, pp. 1-43.
link to table of contents
direct link to pdf file
Friday, 5/27
FINAL PAPER DUE
Student Presentations
Monday, 5/30
NO CLASS. MEMORIAL DAY!
Wednesday, 6/1
Student Presentations
Course Summary
ADDITIONAL TOPICS IN FINANCE
The Stock Market and the Real Economy
Samwick, Andrew A. and James M. Poterba, "Stock Ownership Patterns, Stock Market
Fluctuations, and Consumption" Brookings Papers on Economic Activity, 2:1995, 295-372.
Bernanke, Ben and Mark Gertler, "Financial Fragility and Economic Performance" Quarterly
Journal of Economics, Vol. 105, No. 1, February 1990, 87-114.
Morck, Randall, Andrei Shleifer, and Robert W. Vishny, "The Stock Market and Investment: Is
the Market a Sideshow" Brookings Papers on Economic Activity, 2:1990, 157-215.
Noise Trader Models
De Long, J. Bradford, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldman, “Noise
Trader Risk in Financial Markets,” Journal of Political Economy, Vol. 98, No. 41, 703-738.
Econ 46, Page 8
Shleifer, Andrei and Lawrence H. Summers, "The Noise Trader Approach to Finance" Journal of
Economic Perspectives, Volume 4, No. 2, Spring 1990,19-33.
Dividends: Why pay them? Do they signal anything?
DeAngelo, Harry, Linda DeAngelo, and Douglas Skinner, "Reversal of Fortune: Dividend
Signaling and the Disappearance of Sustained Earnings Growth" Journal of Financial
Economics, 40(1996), 341-371.
Black, Fischer, "The Dividend Puzzle" Journal of Portfolio Management, Winter 1976, 6-8.
Financial Crises
DeLong, J. Bradford, "Financial Crises in the 1890s and 1990s: Must History Repeat?,"
Brookings Papers on Economic Activity, No. 2, 1999, 253-294.
Shiller, Robert J. "Stock Prices and Social Dynamic" Brookings Papers on Economic Activity,
2:1984, 457-498.
Barsky, Robert B. and J. Bradford De Long, "Why Does the Stock Market Fluctuate?" Quarterly
Journal of Economics, Vol. CVII, No. 2, May 1993, 291-309.
Micro Market Structure
Ellis, Katrina, Roni Michaely and Maureen O’Hara, “The Making of a Dealer Market: From
Entry to Equilibrium in the Trading of Nasdaq Stocks,” Journal of Finance, Vol LVII, No. 5
(October 2002), pp. 2289-2316.
link to table of contents
Closed End Funds
Lee, Charles M.C., Andrei Shleifer, and Richard Thaler, "Investor Sentiment and the Closed-End
Fund Puzzle" Journal of Finance, Vol XLI, No. 1, March 1991, 75-109.
link to article OR link to pdf
Pontiff, Jeffrey, "Costly Arbitrage: Evidence From Closed-End Funds" Quarterly Journal of
Economics, November 1996, 1135-1151.
Hardouvelis, Gikas, Rafael La Porta, and Thierry A. Wizman, "What Moves the Discount on
Country Equity Funds?" in Jeffrey Frankel ed.: The Internationalization of Equity Markets
(Univeristy of Chicago Press, Chicago, IL), 345-397.
Froot, Kenneth and Emil Dabora, "How Are Stock Prices Affected By the Location of Trade,"
Journal of Financial Economics, Vol. 53 (2). pp.189-216. August 1999.
Shleifer, Andrei, "Do Demand Curves for Stocks Slope Down?" Journal of Finance, Vol XLI,
No. 3, July 1986, 579-590.
Econ 46, Page 9