Campbell R. Harvey,
Fuqua School of Business, Duke University, Durham, NC
National Bureau of Economic Research, Cambridge, MA
Spring I 1998
This course delivers the theory and the quantitative tools that are necessary for global asset management. The focus of the course is on tactical rather than passive asset management. To this end, we develop the fundamental concepts of asset valuation in a world with time-varying risk and risk premiums. We also focus on the most recent advances quantitative forecasting methods.
A unique feature of this course is that students build their own asset management software. In addition, using some of the techniques in the course, they perform an out-of-sample asset allocation. The most recent data (from DATASTREAM) is used in this real time allocation.
Prerequisites are Business 350 and at least one course in statistical analysis. A facility with matrix algebra, probability theory and statistics through linear regression is essential. Some differential calculus will be used. Students are not expected to be familiar with some of the advanced econometric techniques introduced in the course such as: generalized method of moments (GMM), generalized autoregressive conditional heteroskedasticity (GARCH), nonparametric density estimation, and entropy-based forecasting.
The course material will be presented in lectures and problem sets. Five problem sets will are assigned during the semester. Groups of 5 people (or 4 if necessary) must be formed for the first four assignments. The ideal group includes of one person who has taken the statistical forecasting course, one person who knows some visual basic and one person that has some familiarity with web publishing. The fifth assignment must be completed individually. You must also turn in a sealed envelope with proportional contributions of the other group members (summing to 100%) for each of the assignments one through four - at the end of the semester. All problem sets will be graded. Problem sets should be sent to charvey@mail.duke.edu.
The first assignment is required for all groups. Each group will choose a topic at the beginning of the term which they will become experts on. The group will prepare a WWW learning experience. However, the group needs to prepare a presentation which is focussed on the potential impact of the lecture material on the practice of asset management. I have provided some basic material on HTML (language of the internet).
The goal of the Web exercise is to provide a resource which you, as students and graduates of my course, can use for a long time. Lecture notes have a tendancy to get out of date quickly. The BA453 homepage will be updated every time the course is taught. It is public domain so you can easily check in the future any new features in the course.
In the second assignment, you will design your own quadratic optimization package using SOLVER in EXCEL. I assume that you have done a similar exercise in your statistics course. So this is very simple exercise. This program will take as inputs the expected returns, standard deviations and correlations for five or six global equity markets. These markets can be countries (say, U.S., Japan, U.K., Germany, France, Mexico) or regions (say, U.S., Japan, Europe, other EAFE - Europe and Far East, Emerging Latin America, Emerging Asia , note the U.S. and Japan count as countries and regions!). You can use equities or bonds. The variance of the portfolio will be minimized for a target level of expected return. The program should also contain short-sale constraints and caps on the size of long positions. [This program must be clean enough that you would be proud to run it in front of a prospective employer.]
The third assignment involves forecasting monthly stock returns and foreign currency returns. Each student is in charge of a country. Data will be drawn down from on-line DATASTREAM. Each student should be familiar with using DATASTREAM. The DATASTREAM data for country returns will be supplemented by some Morgan Stanley Capital International (MSCI), International Finance Corporation (IFC) and J.P. Morgan data that I will provide. Part of the task will be to design a set of information variables that can be used to forecast the stock returns and currency returns.
The fourth assignment uses the data of the third assignment. The equity and currency models developed in assignment three are run out of sample on the last day of the month to get an out of sample forecast. For a given level of risk aversion (some tolerance for variance), students are asked to calculate the 'optimal' conditional portfolio weights for their international equity portfolio. This is tactical global asset allocation. In the second part of the assignment, currency portfolios are added to the allocation problem.
The fifith assignment (which is completed individually) draws together all of the main concepts covered in the course.
Bekaert, Geert and Campbell R. Harvey, 1995a, "Time-Varying Conditional World Market Integration," Journal of Finance 1995, 403-444. (P33)
Bekaert, Geert and Campbell R. Harvey, 1997a, "Emerging Equity Market Volatility," Journal of Financial Economics, (W14)
Bekaert, Geert and Campbell R. Harvey, 1997b, ``Foreign Speculators and Emerging Equity Markets," (W31)
Geert Bekaert, Claude Erb, Campbell R. Harvey and Tadas Viskanta, 1997, ``What Matters for Emerging Market Investment," Emerging Markets Quarterly (1997) 1:2, 17-46. (P45)
Geert Bekaert, Claude Erb, Campbell R. Harvey and Tadas Viskanta, 1997, ``The Cross-Sectional Determinants of Emerging Equity Market Returns," Peter Carman, ed., Quantitative Investing ofr the Global Markets: Strategies, Tactics, and Advanced Analytical Techniques, Glenlake, forthcoming. (C11)
Michael J. Brennan, Turun Chordia and Avanidhar Subrahmanyam, 1997, ``A Reexamination of security return anomalies" Working paper, UCLA.
Louis Chan and Josef Lakonishok, 1997, The risk and return from factors, Working paper, University of Illinois.
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1994a, "Forecasting International Equity Correlations," Financial Analysts Journal November/December 32-45. (P27)
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1994b, "National Risk and Global Fixed Income Allocation," Journal of Fixed Income September, 17-26. (P23)
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1995a, "Country Credit Risk and Global Portfolio Selection," Journal of Portfolio Management Winter 74-83. (P26)
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1995b, "Do World Markets Still Serve as a Hedge?" Journal of Investing (forthcoming). (P28)
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1995c, "Expected Returns and Volatility in 135 Countries," Journal of Portfolio Management Spring 1996, pp. 46-58. (P36)
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1995d ``Inflation and World Equity Selection,'' Financial Analysts Journal, November-December, 28-42. (P34)
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1996a,``Political Risk, Financial Risk and Economic Risk,'' Financial Analysts Journal (P38) [prev. W23]
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1996b``The Influence of Political, Economic and Financial Risk on Expected Fixed Income Returns," Journal of Fixed Income (1996): forthcoming. (P39) [prev. W24]
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1997a ``Demographics and International Investment,"Financial Analysts Journal (P41)[prev. W27]
Erb, Claude, Campbell R. Harvey and Tadas Viskanta, 1997b, Country Risk in Global Financial Management, forthcoming monograph, AIMR.
Fama, Eugene F., 1991, "Efficient Capital Markets: II," Journal of Finance 46: 1575-1617.
Fama, Eugene F. and Kenneth R. French, 1992, "The Cross-Section of Expected Stock Returns" Journal of Finance 47, 427-465.
Fama, Eugene F. and Kenneth R. French, 1993, "Common Risk Factors in the Returns on Stocks and Bonds," Journal of Financial Economics 33, 3-56.
Fama, Eugene F. and Kenneth R. French, 1997, ``Value versus growth: The international evidence" Working paper.
Ferson, Wayne E. and Campbell R. Harvey, 1993, "The Risk and Predictability of International Equity Returns," Review of Financial Studies 6: 527-566. (P21)
Ferson, Wayne E. and Campbell R. Harvey, 1994a, "Sources of Risk and Expected Returns in Global Equity Returns," Journal of Banking and Finance 775-803. (P24)
Ferson, Wayne E. and Campbell R. Harvey, 1994b, An Exploratory Investigation of the Fundamental Determinants of National Equity Market Returns, with Wayne Ferson, in Jeffrey Frankel, Editor, The Internationalization of Equity Markets, (Chicago: University of Chicago Press) 59-138. (C1)
Ferson, Wayne E. and Campbell R. Harvey, 1997, ``Country Risk in Asset Pricing Tests," Journal of Banking and Finance forthcoming. (W7)
Ferson, Wayne E. and Rudi Schadt, 1996, "Measuring Fund Strategy and Performance in Changing Economic Conditions,"Journal of Finance.
Glodjo, Arman and Campbell R. Harvey, 1996, "Forecasting Foreign Exchange Market Returns via Entropy Based Coding: The Framework," Working paper, Fuqua School of Business. (W13)
Graham, John and Campbell R. Harvey, 1996, "Market Timing Ability and Volatility Implied in Investment Newsletters' Asset Allocation Recommendations," Journal of Financial Economics 397-422. (P37).
Harvey, Campbell R., 1991a, "The Term Structure and World Economic Growth," Journal of Fixed Income, 4-17. (P6)
Harvey, Campbell R., 1991b, "The World Price of Covariance Risk," Journal of Finance 46, 111-157. (W10)
Harvey, Campbell R., 1991c, "The Specification of Conditional Expectations," Working paper, Fuqua School of Business. (W6)
Harvey, Campbell R., 1995a, "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies 773-816. (P32)
Harvey, Campbell R., 1995b, "The Cross-Section of Volatility and Autocorrelation in Emerging Markets" Finanzmarkt und Portfolio Management 12-34. (P29)
Harvey, Campbell R., 1995c, "The Risk Exposure of Emerging Equity Markets," World Bank Economic Review19-50. (P30)
Harvey, Campbell R., 1997, ``The International Cost of Capital and Risk Calculator (ICCRC)," Working paper.
Harvey, Campbell R. and Akhtar Siddique, 1997, "Conditional Skewness in Asset Pricing Tests," Working paper, Duke University.
Harvey, Campbell R., Bruno Solnik and Guofu Zhou, 1995, "What Determines Expected International Asset Returns," Working paper, Fuqua School of Business. (W8)
Harvey, Campbell R., and Guofu Zhou, 1993, "International Asset Pricing with Alternative Distributional Specifications," Journal of Empirical Finance 1: 107-131. (P20)
Sandeep Patel, ``Cross-sectional variation in emerging markets equity returns" Working paper, J. P. Morgan.
Harvey, Campbell R., "Active Asset Allocation in Emerging and Developed Markets." (PM5)