Doctoral School in Finance and EconomicsDSEF

Advanced Investment Theory

1. Course details

Semester: 2

Credit rating: 3 ECTS

Teaching units: 30

Pre-requisite(s):Basic courses on Investments and Derivatives.

Lecturers: Professor Matti SUOMINEN

Administrator: Emmanuelle Ambroisien

Tutors: none

Seminar times and rooms:

please see Point 3

Tutorial times and rooms:

none

Mode of assessment:

Exam

Additional work: There will be at least 2 exercise sets during the course

Examination Periods:

Exam follows the last lecture

2. Aims and objectives

Aims

This course provides a technical introduction to financial markets and asset pricing theories under perfect and imperfect information. In addition we study the role of hedge funds in the securities markets. The course is suitable for mathematically oriented Masters students or Doctoral students seeking to develop a deeper understanding of the modern finance theory, quantitative finance and hedge funds.

Course can be completed in two ways: Either by taking an exam or by writing a 20-30 page independent study on a subject directly related to the course material (the topic must be approved by the Professor).

Exercises comprise and integral part of the program. Through exercises a student can earn bonus points to be added to the exam score (max 100) or the score from the written report (max 100).

Learning Objectives

On completion of this course unit successful students will be able to:

1. Develop independently quantitative trading strategies

2. Understand the role and attractiveness of hedge funds3. Plan of semester:

Place: Luxembourg School of Finance, 4 rue Albert Borschette, L-1246 Luxembourg (Kirchberg)Room: Building K2 –B2, 2nd Floor, Meeting room

Dates2014

RoomLSF

Time Lecture nr. / Topic

Mon02.06

LSF

Building K2 – B2

Meeting room

09.30-11.45 1. Investment and portfolio choice in discrete time2. Modeling financial markets in continuous time I

14.00-16.30 3. Modeling financial markets in continuous time II4. Options and term structure of interest rates

Tue 03.06

09.30-11.45 5. Portfolio choice in continuous timeExercises on continuous time finance

14.00-16.30 6. Modeling financial markets

Wed04.06

09.30-11.45 7. Liquidity and asset prices I

14.00-16.30 8. Liquidity and asset prices II

Thu05.06

09.30-11.45 9. Agency problems, bubbles and price manipulation

14.00-16.30 10. Empirical asset pricing anomalies

Fri 06.06

09.30-11.45 11. Hedge funds’ investment strategies I

14.00-16.30 12. Hedge fund’s investment strategies II

4. Course details (by lecture):

I. FINANCE THEORY UNDER PERFECT INFORMATION

LECTURE 1. Investment and portfolio choice in discrete time LECTURE 2. Modeling financial markets in continuous time I

- Hull, Ch. 12, 13- Black & Scholes, 1973, The Pricing of Options and Corporate Liabilities, Journal of Political

Economy. linkLECTURE 3. Modeling financial markets in continuous time IILECTURE 4. Options and term structure of interest rates

- Hull Ch 25, 26LECTURE 5. Portfolio choice in continuous time

II. FINANCE THEORY UNDER IMPERFECT INFORMATION AND THE LIMITS OF ARBITRAGE

LECTURE 6. Modeling financial markets - Grossman and Stiglitz, 1982, On the Impossibility of Informationally Efficient Markets,

American Economic Review, linkLECTURE 7. Liquidity and asset prices I

- Kyle, 1985, Continuous Auctions and Insider Trading, Econometrica link- Admati and Pfleiderer, 1988, A Theory of Intraday Price Patterns, Review of Financial

Studies, 1988 link- Grossman and Miller, 1988, Liquidity and Market Structure, Journal of Finance link

LECTURE 8. Liquidity and asset prices II- Duffie, Presidential Address: Asset Price Dynamics with Slow-Moving Capital, Journal of

Finance, link- Gromb and Vayanos, 2010, Limits of Arbitrage: The State of the Theory, Annual Review of

Financial Economics, link- Pastor and Stambaugh, 2003, Liquidity Risk and Expected Stock Returns, Journal of

Political Economy link- Amihud, 2002, Illiquidity and Stock Returns: Cross Section and Time-Series Effects,

Journal of Financial Markets link- Rinne and Suominen, 2010, Short-Term Reversals, Returns to Liquidity Provision and the

Costs of Immediacy, linkLECTURE 9. Agency problems, bubbles and price manipulation

- De Long, Shleifer, Summers, and Waldmann, 1990, Noise Trader Risk in Financial Markets, Journal of Political Economy link

III. ANOMALIES AND THE ROLE OF HEDGE FUNDS

LECTURE 10. On empirical asset pricing anomalies- Jegadeesh and Titman, 1993, Returns to buying winners and selling losers: Implications

for stock market efficiency, Journal of Finance link- Lehmann, 1990, Fads, martingales, and market efficiency, Quarterly Journal of Economics

linkLECTURE 11. Hedge funds’ investment strategies I

- Jylhä and Suominen, 2010, Speculative Capital and currency carry trades, Journal of Financial Economics, link

- Gatev, Goetzmann and Rouwenhorst, 2006, Pairs Trading: Performance of a relative-value arbitrage rule, Review of Financial Studies, link

LECTURE 12. Hedge fund’s investment strategies II- Sadka, 2010, Liquidity risk and the cross-section of hedge-fund returns, Journal of

Financial Economics, link- Khandani and Lo, 2010, What happened to the quants in August 2007?: Evidence from

factors and transactions data, Journal of Financial Markets, link

5. Reference list/ Bibliography:

General references:- Hull, Options, Futures and Other Derivatives, 6th Edition, 2006- Huang and Litzenberger, Foundations for Financial Economics, Elsevier, 1988- Jarrow Eds. Handbooks in OR and MS, Finance, 1995- Malliaris and Brock, Stochastic Methods in Economics and Finance, North Holland, 1991- Merton, Continuous-Time Finance, Blackwell 1990- O’Hara, Market Microstructure Theory, Blackwell 1995

Additional References:- Lecture notes - Articles listed during the course

6. Further information about assessment:

Examination(s) Either Essay or Exam

Weighting: 100%

Date: (to be confirmed)

Length:Exam 2hrs; if no exam, then paper 20-30p report