ECON UN3025 Syllabus PDF

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Department of Economics ECON UN 3025 Section 001 ECONUN3025_FT20_S001 Fall 2020 Columbia University

ECON UN 3025: Financial Economics COURSE AND INSTRUCTOR INFORMATION Faculty: Email address : Office : Office hours: Course Web site: Class time and room:

Tamrat W. Gashaw, Ph.D. [email protected] International Affairs Building 1001A TH: 4:00 – 6:00 P.M. https://courseworks2.columbia.edu/105326 TU, TH: 11:40 A.M. - 12:55 P.M. ; Zoom Meeting Room.

TEACHING ASSISTANTS INFORMATION: There are four TAs for this class and here is their information: TA’s Name: Email address: Office hours: Recitation:

Amanda Aku Ahornam Awadey [email protected] Tue., 4:00-5:00 PM and Fri., 7:00-8:00 AM Wed., 2:30-3:45 PM, Zoom Meeting Room

TA’s Name: Email address: Office hours: Recitation:

Cheng Jn [email protected] Tues., 10:15-11:15 AM and Thurs., 10:15-11:15 AM Thurs., 8:55-10:10 AM, Zoom Meeting Room

TA’s Name: Email address: Office hours: Recitation:

Lizi Yu [email protected] Thurs., 8:00-29:00 PM and Fri., 9:00-10:00 AM Mon., 3:00-4:15 PM, Zoom Meeting Room

TA’s Name: Email address: Office hours: Recitation:

Wenda Li [email protected] OR [email protected] Mon., 9:00-10:00 AM and Wed., 8:00-9:00 PM Tues., 9:00-10:15 PM, Zoom Meeting Room

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COURSE DESCRIPTION: This course (ECON UN 3025) is a rigorous introduction to the principles of financial assets allocations into different investment ventures, financial asset valuation, and the structure and functions of financial markets and institutions. It introduces students to the role of financial markets, particularly price determination in these markets, using the tools of modern financial theory. This course covers the tools for risk-return analysis, portfolio theory and analysis, the Capital Asset Pricing Model (CAPM), the Efficient Markets Hypothesis (EMH), Stock and Bond valuations, Interest Rates, Derivatives, and International diversification. PREREQUISITS: SUGGESTED TOPICS TO REVISE

ECON UN3211: INTERMEDIATE MICROECONOMICS. • • • • • • •

The allocation of (financial) resources Constrained and unconstrained optimization Theory of Supply and Demand Types of Market Structures (i.e., its implication for EMH) Theory of Consumer/Investor Behavior Theory of (Expected) Utility Decision under uncertainty

ECON UN3213: INTERMEDIATE MACROECONOMICS • • • • • • •

Determination of output, employment, inflation and interest rates. Monetary and fiscal policy, Consumption, savings and national income accounting, The role and importance of the Financial System (Financial Institutions + Financial Markets) Financial regulation, risk, and uncertainty Country-wide risk (Inflation, Currency, Policy, etc…) Open-economy models (i.e., its implication for international portfolio diversification)

STAT UN1201: CALCULUS-BASED INTRODUCTION TO STATISTICS. • • • • • •

Random variables and probability density functions/distributions, (pdf, cdf, etc.), Measures of Central Tendency and Dispersion (Expected value/mean, variance, correlation, conditional distribution, conditional mean and conditional variance) Law of iterated expectations, (i.e., normal-, chi-square-, F- and t-distributions), Simple Linear Regression, (parameter estimation, properties of estimators) Hypothesis testing, p-value, confidence intervals, Law of large numbers and central limit theorem

COURSE LEARNING OUTCOMES After studying this course, you will be able to: 2

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Goal 1: [THEORY] Understand basic Principles of Modern Finance. o Explain the roles and importance of the Financial System (i.e., Financial Markets and Institutions) in the modern economy. o Demonstrate understanding of and ability to apply modern theories of asset price/return determination and financial portfolios. o Develop a basic understanding of futures and options markets and their relationship to price determination in equity and debt markets. Be able to synthesize and apply this understanding in taking financial positions. o Articulate and show mathematically arbitrage pricing relationships in Modern Finance theories of equities, bonds, futures, and options.

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Goal 2: [APPLICATION] Gain practical investment and portfolio management skills by using Stock Trak investment simulation software. o Demonstrate ability to identify securities, analyze their historical records, make investment decisions (i.e. financial resource allocation), and construct your own investment portfolio to manage. o Clearly communicate and present financial analysis and strategies in written form articulating your investment decisions in constructing a portfolio, trading, taking different positions, and managing it.

REQUIRED TEXTBOOK AND OPTIONAL READINGS 1. Textbooks • Zvi Bodie, Alex Kane, and Alan J. Marcus. 2018. Investments. 11th Edition. New York, NY: McGraw-Hill Education. (Main Textbook) • Simon Benninga. 2014. Financial Modeling. 4th Edition. Cambridge, MA: MIT Press. (Recommended) • Cuthbertson, Keith and Nitzsche, Dirk. 2001. Quantitative Financial Economics: Stocks, Bonds and Foreign Exchange. 2nd Edition. New York, NY: John Wiley and Sons. (Recommended) • Frank J. Fabozzi, Edwin H. Neave, Guofu Zhou. 2012. Financial Economics. First Edition. New York, NY: John Wiley and Sons. (Recommended) 2. All students will have a Stock Trak account— www.stocktrak.com —which allows online trading with “fake money” in real-world financial markets in real time. 3. Other readings will be linked to in the course outline below, handed out, or posted to https://courseworks.columbia.edu/ EXAMINATIONS AND GRADING: Your grade will be based on attendance & participation, quiz (conditional), problem set assignments, portfolio simulation assignment, and examinations. There may be a quiz towards the 3-4 weeks to help you test yourself. There are two examinations (one midterm exam and one comprehensive final examination) in this course and both will be proctored on Proctorio. The midterm exam account for 20% (or 25% if no quiz) of the

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final course grade and the final exam will be worth 30%. The date of midterm exam will be on 10/22/2020 and if there is a change it will be announced in class at least one week in advance. The final exam is comprehensive and will be held on Thursday, December 17, 2020: 4:10 P.M. – 7:00 P.M. Problem set assignments will be worth 25% of your grade. I plan to post a total of ten problem set assignments and each of which is covering two chapters. These problem sets will be mostly empirical and they will be posted on the course Web page (i.e., https://courseworks2.columbia.edu/courses/105326). and also, on gradescope. Please submit your problem sets on gradescope (https://www.gradescope.com) on or before the due dates and times. Assignments handed in after the due date/time, but before answers are distributed will be marked down by 50%. The link for our section on gradescope is https://www.gradescope.com/courses/180516. The registration code is 9W7KD. Assignments turned in after answers are distributed will receive no credit. Problem sets will be posted on Thursdays at or before 8:00 PM and due on the following Thursdays no later than 10:00 PM. If there will be changes, I will announce that in class. The solutions for the previous problem sets will be posted on Fridays at or after 12:00 PM. Students are encouraged to work with other students of the class on their problem sets, but each student must write up his or her answers separately. The maximum group size is 3. Please list the name(s) of those with whom you worked on your assignment. At the end of the semester, I will convert your total points out of 20%. You are responsible to both turn in assigned problem sets and/or assignments on time and to check your scored problem sets from the TAs either by going to the gradescope website where you submitted your problem sets or by emailing or visiting the grading TAs. You can raise any grading related concerns or issues within two weeks of time since the grades are posted by the grading TAs. Please don’t wait until the end of the term and start complaining about the first set of problem sets that have been graded months ago. If you do, I and the TA will not be entertaining your requests.

See the class schedule table for the list of problem sets with their tentative posting and due dates: STOCK TRAK ASSIGNMENT: This simulation assignment will be 15% of your total grade. STOCK TRAK is an almost real-time investment-portfolio simulation program available and operated by STOCK TRAK. Suppose that an alum of Columbia University has just donated a $1,000,000 (i.e., each student will have a $1 million pretend cash balance with which to trade online) to the Department of Economics. In addition, congratulations, you have been hired as a portfolio manager to manage this fund. Although, the initial fund is pretend cash, this

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simulation provides you actual prices of most securities in most public markets in different countries. Upon hiring, the department comes up with the following specific trading rules and guidelines. These are: • The objective of this fund is to outperform the standard benchmark, S&P 500 (i.e., first benchmark) as well as a randomly assembled portfolio that we will be creating in class (i.e., second benchmark). • This is an aggressive fund that requires an active (i.e., not passive) management strategy. • As the portfolio manager of this fund, you must select an investment strategy that you expect to outperform the S&P 500. • The department (i.e., the owner of this fund) believes that for portfolio managers to earn their high salaries, they are required to engage in active trading. This means that you must perform a minimum of 100 trades and a maximum of 400 trades. (A trade consists of opening or closing a position—so, buying 100 shares in AAPL would be 1 trade, and selling those shares would be another trade.) • The fund will be created on September 15, 2020 and the fund will automatically be liquidated on December 11, 2020 (the last day of trading) so you only have a few weeks to earn your millions. However, you need to turn in your investment report about your portfolio by December 14, 2020 and your final grade on this assignment will be based on your position as of December 11, 2020. • Your main grade on this project will be based on the quality of your analysis, not on your total return per se. • However, since most portfolio managers are compensated based on their performance, the college is offering the following compensation arrangement. If you accept this arrangement, then you are entitled to the following bonus points -

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Finishing in the top 10 places Out-perform the S&P 500 Out-perform the 2nd benchmark Under-perform the S&P 500 Under-perform the 2nd Benchmark Finishing in the bottom 10 places

1% added to your portfolio project score 1% added to your portfolio project score 1% added to your portfolio project score 1% deducted from your portfolio project 1% deducted from your portfolio project 1% deduction from your portfolio project

As manager of the fund, you can buy or short stocks, bonds, options or futures. There will be 5 required trading exercises for the course; each will use up several of your 400 trades. At the end of the term, you are required to write your performance report about the investment activities that you have been engaged in since September 15, 2020. These are: • Build an equity portfolio of at least 20 stocks (4% of final grade) • Short some stocks (2%) • Build a bond portfolio (2%) • Take multiple positions in futures (2%) • Take multiple positions in options (2%) • Portfolio performance grade (0 - 3%)

Each student is required to write an investment report that will be due on December 14, 2020. In this report, make sure to include a rationale for each decision you have 5

made and your reflection on it. How do you get started? In order to register for your Stock Trak account and into the right class, you need to go to the following link and click on it to be directed to the correct stock trak class room: https://www.stocktrak.com/members/registerstudent?className=ECONUN3025FALL20 20. You can register online with a credit card and the fee in the amount of $31.95 will be charged to your credit card. When you complete the registration, you will be given access information to start your simulation. You need to register before September 25, 2020 and registration opens on September 08, 2020. SUMMARY OF GRADING WEIGHTS: Attendance and Participation: 5% Quiz: 0% OR 5% (may be given on the 3rd or 4th week to help you test yourself conditional on the pace of our class and ultimate class size.) Stock Trak Assignment: 15% Midterm Exam: 20% OR 25% [on October 22, 2020 during class time] Problem Set Assignments: 25% Final Exam: 30% [on December 17, 2020 during class time] COURSE/CLASS POLICY: There is an attendance policy for the course. I will take attendance in every class as it is a graduate level class and I want to encourage active class participation using zoom chat window, polls, and breakout sessions. In this course, consistent attendance and class participation are strongly recommended for good performance. Failure to attend class regularly affects your performance. Attendance and participation are an integral part of the learning process, and success in this course cannot be achieved by simply reading the main text. I will also present material in class that will not be found elsewhere. During each class students are expected to avoid carrying on private conversations, browsing other unrelated websites, avoid any background noises, reading newspapers or working on assignments from other courses. In addition, you are also expected to turn off your cell phones, tablets, pagers, and PDAs prior to entering class unless we need them in class for the purpose of this course as determined by me. You are not allowed to conduct trading on stock trak while the class is in progress. When I review your portfolio, I can see when you carried out a particular investment activity and if I see that you make investments during class time, I will deduct points from your assignment grade. You will be asked to turn on your zoom video when taking exams, answering and/or asking questions. You may be subjected to disciplinary actions if these policies are violated or I may deduct points from your overall score (i.e., your attendance and class participation points may be affected negatively).

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Important! The only email address that should be used for communication is the email address associated with columbia.edu ID. Make-up Policy: Generally, any type of make-up is highly discouraged. Regarding this class, there will not be make-up for any missed problem set and stock trak related activities. For the midterm exam, I may allow you to take the exam with my other section students in the same week if you miss the midterm exam based on a legitimate reason supported by acceptable documentations and/or prior approval from the instructor for your absence on the exam date. However, as for the final exam, generally the university governs the administration of missed final exams. Students who cannot take the final exam must petition their school for an incomplete. If the school grants the incomplete, then the student has the right to take a make- up exam. That exam will be administered by the school at the start of the next semester. If you have three final exams within 24 hours, please let me know as soon as you have that information and I will try to accommodate you by allowing you to take your exam for this class with my other section. In sum, make-up examinations are highly discouraged and you are better-off doing all assignments and exams on time as scheduled.

Statement on Academic Integrity: As all classes in the University, the Honor Code established by the students of Columbia University will be effective in this class as well. If any student is found violating academic integrity, that is cheating, plagiarizing, and committing other academic dishonesty, cannot be tolerated and actions will be taken by me as well as school Deans will be notified. For details of student’s honor code see http://bulletin.columbia.edu/generalstudies/undergraduates/gs-honor-pledge/. Basic Rules for this Course: 1. 2. 3. 4.

Always come to class prepared to learn and participate in class Always ask questions when you don’t understand something Always challenge yourself to do your best in this course Always show respect for everyone in the class – classmate, TAs, the professor, and YOURSELF. 5. Always keep academic honesty and integrity by affirming the honors code. 6. Attempt to attend all recitations and office hours by TAs in order to get additional help.

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ODS Accommodations: If you are a student with a disability and have a DS-certified ‘Accommodation Letter’ please notify me at least 2 weeks prior to the test dates listed above. If you believe that you might have a disability that requires accommodation, you should contact Disability Services at 212-854-2388 and [email protected]. For further information and resources on ODS accommodations, please refer to statement online at http://www.college.columbia.edu/rightsandresponsibilities.

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PRELIMINARY CLASS SCHEDULE - FINANCIAL ECONOMICS MONTH

WEEK

September

Week#1

DATE

DAY

T

8-Sep

H

10-Sep

TOPICS TO COVER PART I: INTRODUCTION Class 1:

PROBLEM SETS Posting

Due

Welcome, Syllabus, and Stock trak

Chapter 0: What is Financial Economics?

PS#1

Chapter 1 - 4: Assigned Reading Chapters

PS#2

PART II: PORTFOLIO THEORY AND PRACTICE Week#2

T

15-Sep

Chapter 5: Risk, Return, and the Historical Record

H

17-Sep

Chapter 6: Capital Allocation to Risky Assets

Week#3

T

22-Sep

Chapter 6: Capital Allocation to Risky Assets and Chapter 7: Optimal Risky Portfolios

Week#4

H T

24-Sep 29-Sep

Chapter 7: Optimal Risky Portfolios Chapter 8: Index Models

H

1-Oct

Chapter 9: The Capital Asset Pricing Model

PS#4

PS#3

Week#5

T H

6-Oct 8-Oct

Chapter 10: APT and MFM of Risk and Return Chapter 10: APT and MFM of Risk and Return

PS#5

PS#4

Week#6

T

13-Oct

Chapter 11: The Efficient Market Hypothesis

H

15-Oct

Chapter 12: Behavioral Finance and Technical Analysis

PS#6

PS#5

T

20-Oct 22Oct

Chapter 13: Empirical Evidence on Security Returns

PS#3

PS#1,2

PART III: EQUILIBRIUM IN CAPITAL MARKETS October

Week#7

H

MID-TERM EXAMINATION PART IV: FIXED-INCOME SECURITIES

Week#8 Week#9 November

Week#10

T H

27-Oct 29-Oct

Chapter 14: Bond Prices and Yields Chapter 14: Bond Prices and Yields

T H T H

3-Nov 5-Nov 10-Nov 12-Nov

University Holiday [Election Day - No Class] Chapter 15: The Term Structure of Interest Rates Chapter 16: Managing Bond Portfolios Chapter 16: Managing Bond Portfolios

PS#6 PS#7 PS#7

PART V: DERIVATIVE SECURITIES Week#11 Week#12

T H

17-Nov 19-Nov

Chapter 20: Options Markets: Introduction Chapter 20: Options Markets: Introduction

T

24-Nov 26Nov 1-Dec 3-Dec 8-Dec 10-Dec 15-Dec 17Dec

Chapter 21: Option Valuati...