Course Description
An introduction to stock market anomalies and ways to predict their strength, to profit from them, and to measure the risks of doing such trading strategies. We consider the most well-known empirical deviations from the CAPM and the most popular ways to fix the CAPM to understand the nature of the deviations.
Additional Requirements for Graduate Students:
The graduate class on trading will be more case-based and more
focused on equity trading. The incorporation of cases will
provide students with exposure to real-life choices that they
are likely to have later in their trading-related careers. The
focus on equity trading will involve in-depth coverage of asset-
pricing models that are used for measuring risk and for
performance evaluation. Several classes will also be dedicated
to measuring trading costs and understanding liquidity and
liquidity risk.
Athena Title
Trading Strat and Finan Models
Prerequisite
(FINA 3000 or FINA 3000E or FINA 3000H) and (MSIT 3000 or MSIT 3000E or MSIT 3000H or BUSN 3000 or BUSN 3000E or BUSN 3000H) and (FINA 4310 or FINA 4310E)
Semester Course Offered
Offered fall and spring
Grading System
A - F (Traditional)
Course Objectives
This course teaches a methodolgy for stock trading. Specifically, the stategy involves learning about the most well- known deviations from the CAPM(anomalies) and how to identify new ones; learning how to form optimal trading strategies that profit from the anomalies; learning how to measure risks of these strategies and to evaluate their performance. This course is open to all business majors so some of the benefits of this class accrue to the students in our Student Managed Investment Fund (SMIF), but that is for a limited number of students. This is open to all business students who have taken Investments and thus trading can be exposed to Finance and Non-Finance majors not in SMIF (although this class is beneficial to SMIF participants also). The student will gain a deep understanding of many of the advanced trading techniques used in financial markets. They will engage in the trading techniques themselves. This has a direct benefit for those who want to engage in trading as a career. However, to other business workers (and government workers) an understanding of the techniques, models, and effects of trading strategies can have significant benefits in their decisions that are directly or indirectly affected by the financial markets.
Topical Outline
I. Short Sales a. How to do it b. Short positions as "insurance" c. Zero-investment portfolios d. Shorting costs and future returns e. Proxies for shorting costs f. Shorting costs, uncertainty and future returns II. Alpha a. Definition and estimation b. Alpha as trading strategy return c. Reasons for non-zero alpha: higher risk and/or larger losses in "bad times" d. Alpha and non-traded factors III. Anomalies a. Market efficiency with frictions (example: filters?) b. Definition and potential explanations (rational/behavioral/data mining) c. Value effect and size effect d. Momentum and reversal e. New issues puzzle f. Seasonality (January/Monday effect) g. Uncertainty and future returns (Ang et al., 2006, Diether et al., 2002) h. Accrual anomaly i. Distress risk effect IV. Options a. Basics and hedging (delta, protective put, etc.) b. Strategies with simple options (straddle, cap/floor/collar, etc.) c. Exotic options d. Option-like securities (distressed equity, callable/convertible bonds)