Empirical Asset Pricing 35905

Prof. John H.Cochrane

john.cochrane@chicagobooth.edu HPC459 702 3059

Latest update: Feb 28 2011 .

NOTE: some of the links on this page have broken with the passage of time. I'll fix them if and when I teach the class. In the meantime, if you find a broken link just google the paper instead.

Class Description
Documents - problem sets, lecture notes, etc.


Friday problem sets
1. Send it by email rmano@uchicago.edu 2. leave it in Rui's folder in Rosenwald 2nd floor, by 3.30pm

We WILL have a class Mon Jan 17. Really, do you want to try to reschedule? You will need a booth id to get in the door. Rui will be by the main door 5807 S. Woodlawn 8:20-8:30 to let in anyone who doesn't have a card.

Class Meeting Times: M 8:30-12:00 C09

Review Wed 8:30-10 3A

No friday class. We'll do a three hour class on mondays. There was no way to get around conflicts

Exam: Finals week, C09 M 8-11 Per booth exam schedule

Class description


First I survey facts, then theories constructed to understand the facts.


The class will center on reading and discussion of articles and problem sets. You must read and think about the readings before class, and be ready to discuss the readings in class. I will call on you and occasionally ask students to lead discussions on papers or parts of papers. You should be ready to do this.

Grades will reflect class participation, homework, and a final exam. The final exam takes place as per the Booth final exam schedule.

Bring a name card to every class if you want class participation grades or me ever to learn your name.

Write your own problem set. You may talk to anyone you want while doing problem sets.

You will need a copy of my Asset Pricing, preferably the revised edition with no (known) typos. The articles will be available as pdfs from the class website. You need to be able to do empirical work. I recommend matlab and can help with it, but use what you want. You need to be able to get crsp data from wrds. Figure out how to do it.

Prerequisites: I don't enforce strict prerequisites. I presume everyone has taken either my or Ralph Koijen's 35904 or George Constantinides' 35912, and a large part of the first-year PhD micro and macro sequences. If you haven't taken finance before, at least really read Ch1 of Asset Pricing carefully before class starts.

Rules: Note some problems are similar to previous year's problems. Using previous year programs or solutions is a major honor code violation. There are enough changed numbers, changed questions, typos and mistakes in previous solutions, that it will take more time to use those than to start fresh.

Class Documents - problem sets, lecture notes, etc.

Problem set 1 - due Mon week 2
Problem set 1 answers Yes, I meant "consistent" not "unbiased".
Olsgmm function called by program
Data files: wvr sbbi cay vwr and sbbi updated 12/28/2011. Note my program is set up with data files in a different directory. Modify the load statements according to where you put data.

Problem set 2 - due Mon week 3
Problem set 2 answers

Problem set 3 questions. Due Friday week 4
Problem set 3 answers
Program Also uses vwr from above

Problem set 4 1/29 questions Due next Friday
Problem set 4 answers

Overheads The pictures I showed in class. Updated 1/23/2011

Lecture notes. On stock predictability. Beginning through the dog that didn't bark. Updated 1/23/2011. Cleaned a bit, and includes the way I presented things in lecture 2011.

Disclaimer: These are my notes. They are not a substitute for doing the readings, and they certainly are not a substitute for showing up in class! They will help you if you miss a point in class. They are not written well. I also massively over-prepare, so I will not cover in class every point made in the notes.

Bonds and FX overheads 2/7/2011 update, reflects class 2/7,
Bonds notes 2/7/2011 update,

FX notes 2/14/2011

Problem set 5 questions At last! Worth the wait.
Data: famabliss.txt
Problem set 5 Answers

Fama-French Overheads 2/21

Empirical methods notes. Time series, cross section, and eigenvalue decompositions 2/21

Problem set 6 2/21
Factors data; portfolio returns data 2/21
Problem set 6 answers 2/28
tsregress2 function

Problem set 7 questions.2/28
Size data
Beme data
(Also use Fama French 25 portfolios and factors above)
Problem set 7 answers; Matlab program; Other beme data used in my program 3/7

Notes on Frictions and Financial Crisis. From Lamont&Thaler to Duffie 3/7

---- End of active Class Documents links --------

totaldiff function

Fama-French notes 2/25 update includes empirical methods notes,and a derivation of eigenvalue factor models by popular request

Production notes 3/3 update3/8

Frictions and financial crisis notes 3/10
Slides on financial crisis (lots and lots of pretty pictures) 3/10

Final exam review problems 3/10 Revised 3/13 to fix the mistake in the answers to stock predictability question 1

Final exam answers 3/18

Notes on equity premium and lightning m* review
Notes on International risk sharing and Habits
Notes update habit notes, and notes on utility functions
Notes on investment and production


I expect you to read the "main" readings closely. There are some "reference" readings which contain material I'll talk about in class and additional papers you should know about, but I don't expect you to read them.

Week 1.

Week 2-3: Return predictability, long horizons, volatility, bubbles, present value relations, price and return decompositions, VAR representation, univariate mean-reversion.


I have only assigned the "summary" version of predictability, but of course I hope someday you'll sit down and look at some of the originals, especially mine.

John Campbell Classics: The linearized present value relation, and some of his contributions to the stock predictability literature. (There's lots more on Campbell's website.)

Week 4a: Econometric issues in return predictability.

Week 4b Bond return predictability


Week 5a FX predictability



Week 8 Cross-sectional facts Size, B/M, momentum, accounting sorts, in expected returns and covariances


Week 9/10a Short sales and liquidity; securities with value in trading; order flow and prices

We just had a huge financial crisis. We can only scratch the surface, but this will frame so much research for the next few years I can't leave it out. Liquidity, bank runs, "flight to quality," short constraints, funding constraints, mortgages, regulatory arbitrage, the idea that stock prices could be driven down when hedge funds were forced to liquidate, lots of little "arbitrages," including different prices for bonds and CDS, violations of covered interest parity, a huge on the run/off the run spread, the idiocy of writing put options and calling it "arbitrage," and so on. This should be a a whole course, and I'm sure some day it will be.

Many (most) of the facts and ideas springing from the financial crisis are not new, but just bigger versions of old puzzles. For this reason, we'll read some pre-crisis papers that bear on the same issues.


I'll present results from these in class.

Week 10b Financial Crisis

Reference Some of my writings on financial crisis

Week 10c Closing thoughts. Fun, and speculating about future research

Additional Reading Suggestions (i.e. things I couldn’t stuff in to 10 weeks)

Equity premium



Preferences and macro-asset pricing

A quick overview of the other preference-based approaches to macro/asset pricing, recursive utility, incomplete markets, multiple goods, labor income. These topics are far more important than the short treatment I'm going to give them, but I'm leaving the big work to Hansen and Heaton.

Dynamic Portfolio Theory.


Liquidity, shorting, downward sloping demand

These are more general for if you get interested in the subject

"Production based"' and investment models.

Reference: I will discuss in class some results from the following

I'm leaving out here the very important topic of general equilibrium models that address the asset pricing facts (e.g. Gomes, Kogan, Zhang; Gala; Gourio). Again, we have to stop having fun somewhere. Getting value and growth effects out of models like these has been a big challenge. You need an interesting cross section of firms, but you don't want to carry around huge state variables .

Financial crisis

There is a huge amount being written on the financial crisis of course. Anil Kashyap will teach an MBA course on it this spring, which you might take if you want to do research on this topic. These struck me as particularly good




Structured products and repos


----- THE END-----