AcF 701 – © Associate Professor George Wang 2020 Page 1 Associate Professor George Wang Department of Accounting& Finance Lancaster University Management School Bailrigg, Lancaster England, United Kingdom
[email protected] AcF 701 Empirical Asset Pricing: Advanced Topics in Mutual Funds and Investment Strategies Dr. George Wang 2019/2019 Academic Year © Do Not Distribute or Copy Unless Authorized © 1. Course Description The class introduces the fundamentals of investment strategies and some of the main strategies used by mutual funds, hedge funds and proprietary traders. In class and through reading exercises and discussions, the strategies are illustrated using real data and students learn to use “backtesting” to evaluate a strategy or fund performance. The class is highly quantitative. It requires students to work independently, analyze and manipulate large datasets. During the nine weeks (Week 22-30) of the Summer Term, it is compulsory for students to attend all the lectures and training sessions designed to provide an introduction to the key literature and research methods. Both during and following this taught component, students are required to undertake independent research that (i) reviews the academic literature relating to investment strategies and investment funds, and (ii) reports empirical evidence of the effectiveness of a chosen investment or investment funds dimension. This document provides details of the taught element of AcF 701. 2. Instructors Course Director Dr. George Wang, Associate Professor of Finance Department of Accounting and Finance, LUMS Online Office Hours: by email appointment, conducted through Teams Email:
[email protected] SAS Programming Instructor, Topic Leader & Teaching Assistant Ms. Kaiwen Tian, Ph.D Candidate in Finance Department of Accounting and Finance, LUMS Email:
[email protected] SAS Programming Instructor, Topic Leader & Teaching Assistant Ms. Adina Yelekonova, Ph.D Candidate in Finance Department of Accounting and Finance, LUMS Email:
[email protected] AcF 701 – © Associate Professor George Wang 2020 Page 2 About the Course Director: George is an Associate Professor of Finance at Lancaster University Management School. He is recently a Visiting Research Professor at New York University Stern School of Business and an Honorary Associate Professor of Finance at Alliance Manchester Business School. He received his Ph.D. in Finance from the University of Melbourne, where he studied with Professors Bruce D. Grundy (Ph.D, Chicago) and J. Spencer Martin (Ph.D, Wharton). During his Ph.D, he was a Visiting Doctoral Scholar at NYU Stern working with Professor Stephen J. Brown (Ph.D, Chicago) on mutual funds and hedge fund strategies in 2012. He won Teaching Excellence Recognition twice while working for AMBS as a full-time tenured Assistant Professor from 2013 to 2017. George's research interest is in the area of empirical asset pricing and investments with a particular focus on mutual funds, factor investing and hedge funds. His work has been published at leading academic journals and international conferences. He currently supervises DBA, Ph.D. and Master students in fund management, momentum, value and growth investing. Before moving to academia, George was a practitioner at Origo Partners PLC on cross-border and domestic private equity investment and Societe Generale Asset Management Fund Management's Shanghai office on financial engineering. He sits on the board of a largest carbon finance company and a boutique investment management firm in China. Previously he was a special advisor and contributor to the Australian Davos ADC Forum: Future Summit - China. 3. Prerequisite, Programming and Data Prerequisite and important background information: High achievements in AcF 602 Advanced Investments will be a nature fit for AcF701. Alternatively, high achievement in AcF 609 Financial Econometrics or ACF644 Advanced Investment Research Methods will be also correlated with the final success of AcF 701. There is no official prerequisite for AcF 701, please feel free to discuss your choices with Dr. Wang. A good understanding in investment/portfolio management courses such as AcF 602, AcF 644 or AcF 541 will be critical for success in this specific dissertation topic. Programming: SAS will be introduced and used extensively for chosen investment strategy. High achievement in econometrics related subjects, previous knowledge in at least one of the following programming languages or econometric packs (e.g. EVIEWS, VBA, STATA, MATLAB, SAS, Python, R, C++, Fortran, Gauss, Mathematica), and strong desire to input hard work to improve programming skills will be critical for high achievement in AcF 701 topic. Databases: WRDS, WIND, MorningStar Direct, Thomson Reuters Institutional Investors Holding Database, CRSP Mutual Funds, CRSP-COMPUSTAT-Merged and DataStream databases will be made accessible for the course. 4. Teaching and Engagement Arrangement (Important) Due to the impact of Covid-19, we will operate our AcF 701 stream through Microsoft Teams (online live video class). To ensure an efficient operation of our class, everyone is required the following: • 24 hours before the class: please double check that you have received George’s email with the class link titled “Join Microsoft Teams Meeting”. • Before the online meeting, please make sure: 1) you have stable internet connection; 2) your camera and microphone are working, and 3) dress up properly just like you are attending the usual class, so that you are ready to present yourself and contribute to our class AcF 701 – © Associate Professor George Wang 2020 Page 3 • Attendance Requirement (compulsory): During this challenging time, I would very much encourage everyone in our group to actively participate to our class. I will enquire everyone’s time and arrange the online class to facilitate everyone’s time schedule. Please note that everyone is required to attend all online sessions and the attendance mark is 10 marks. You must obtain George’s permission if could you could not attend the class. 5. Taught course structure Due to the impact of COV-19, we will operate the course through Microsoft Teams (online live video class). The course unit has 5 discussion based classes + 5 paralleled training sessions for SAS programming +5 weeks of programming surgeries + compulsory following-up group meetings to be arranged. You are expected to read the prescribed reading list in advance of each lecture. The lectures seek to facilitate students’ understanding by linking the relevant concepts and highlighting the significance of the issues addressed in the reading materials. All participants must attend all SAS training sessions between Week 22 to Week 30. As all the classes (including lectures, programming sessions and surgeries) will be highly discussion and practice based, attendance is compulsory. The attendance and participation account for 10% of the final mark for AcF 701. Any absence or late will be counted as 5 marks (two unapproved attendances will result in an 10 marks loss). A register of attendance will be recorded at the beginning and end of each class. Any absence must be approved by the Course Director and you should also inform the PG office. Failure to attend these classes will seriously jeopardise your ability to successfully complete the dissertation. Students with a poor attendance record who subsequently encounter problems will not receive any special help with their dissertation. As the degree requirement, students are officially required to be full-time on campus until submitting the dissertation. Sessions 1-5 of the taught element of the course deal primarily with the key literatures on investment strategies, investment funds and textual analysis fundamentals. Material covered in these sessions will provide the basis for the literature review section of the dissertation. In Sessions 2 to 3 student groups will present previously assigned papers. Presentation time is 10 minutes. All members of a group should talk. Programming Sessions cover practical aspects of the standard dissertation including data, programming skills and research methods. In the following up Session we will cover the dissertation structure, writing skills and presentation of results. To test your understanding of the readings, you MUST be fully prepared for the classes and complete the required readings under each topic. The course instructors will give extensive feedbacks during and after the classes. Classroom Conduct: Your behaviour should respect your classmates' desire to learn. Try not to come late to class as it is disruptive no matter how quiet you are. If you carry a cell phone, turn it off before entering class. Please do not engage in side conversations during the lecture. Feel free to bring something to drink during all the sessions. Surgery Sessions: In weeks 26 – 35 of the Summer Term, fifteen two-hour online Surgery Sessions will be offered. There you can discuss your ideas and problems with course instructors. You are expected to bring your Dissertation Synopsis with you. 6. Standard Dissertation Synopsis To many of you, identifying and refining research questions could be a significant hurdle in the AcF 701 – © Associate Professor George Wang 2020 Page 4 dissertation writing process. To help you to better manage this and other challenges, you have to prepare a one-page “Dissertation Synopsis”. It will summarize key aspects of your dissertation, including key literature, research questions, hypotheses, methodology and planned sequence of Tables/Figures. For this, a Word template will be available on Moodle which includes detailed guidance on what information to include in the Dissertation Synopsis. Additionally, the Dissertation Synopsis will be discussed in Session 1. The Dissertation Synopsis will help you in two major ways. First, it will help you to focus and structure not only your dissertation but also your dissertation writing process. Second, it will summarize the key aspects of your dissertation and therefore facilitate the process of discussing your ideas during the surgery sessions. You are strongly encouraged to contemplate research questions as early as you can and you should start working on the Dissertation Synopsis NO LATER than Week 26, when we will have covered the majority of the literature. You must present a draft of the Dissertation Synopsis at the first Surgery Session (see below). Your research questions will NOT be finalized until you discuss your Dissertation Synopsis during the surgery session and make necessary amendments to your Dissertation Synopsis. 7. Readings and Moodle site A detailed list of readings for each session is provided below. Much of the reading material for this course consists of articles published in academic journals. Students should note, however, that these reading lists are not an exhaustive list of everything that you can or should read. In your dissertation, you should ideally show that you have sought out, read and understood a wider selection of relevant literature than that covered in this course. You can find electronic journal articles via the University Library’s OneSearch (http://onesearch.lancs.ac.uk/). To look for more recent, unpublished working papers, students should use the Social Sciences Research Network website (www.ssrn.com). Note that you may be requested to register with this website before you can download the working papers. All papers and the registration are free of charge. In addition to journal articles and other material distributed in class, there are a number of standard valuation texts that contain useful material. Recommended examples are as follows, some of which you may have referred to in earlier modules. Recommended Reference book for your interest (not compulsory): • Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined, by Lasse H. Pedersen 2015 Moodle site: When the module commences, all course materials and resources, including the large sample coding, will be made available via the AcF 701 Moodle site. 8. Dissertation Plans and Tasks The following section provides an overview of the specific topics together with a selection of useful readings. General Plan: Week 21-23 Team Formation, Fundamentals and Expectations: all participants should indicate their interest and form different topic teams consisting of two or three members. Topic leaders assist. Week 24 and afterwards Discussions and Presentations: each team should conduct a short and brief AcF 701 – © Associate Professor George Wang 2020 Page 5 Literature Review of a specific topic, using approved searching list (to be distributed in class). Tasks and Deadline: 1. Literature Review Task (5% of final mark): submit a purpose based comprehensive literature review of 2000-3000 words by 5pm, May the 29th, 2020. 2. SAS Exercises and Group Replication Task (5% of final mark): learn SAS 9.4 or SAS 9.5 using the below resources and replicate Table 1 from Jegadeesh and Titman (1993, JF) momentum paper. (Result 1: Replicate Table 1 of Jegadeesh and Titman 1993, Journal of Finance, J=12 and K=3, 6, 9, 12 results; report both 1965-1990 and 1991-2019 samples; Then send me the original code and results. Explain which strategy generate the highest profit. (Due 5pm, May the 22nd, 2020). WRDS has an SAS sample code for Momentum: https://wrds-www.wharton.upenn.edu/pages/support/applications/portfolio-construction-and-market- anomalies/replicating-momentum-strategies-jegadeesh-and-titman-jf-1993/ which you should be able to understand line by line and change the codes yourself. Some useful resources for learning SAS are as bellows. • The most useful resource is the UCLA website: http://www.ats.ucla.edu/stat/sas/sk/default.htm, where they provide many useful examples, slides and visual instructions. There is also a starter course for SAS to assist you. Please check it often and try as many examples as you can. • The Little SAS Book. There should be a few copies available in the library. There is a website to download the sample code and data (http://support.sas.com/documentation/onlinedoc/code.samples.html). Please try as many example codes as you can. 3. First Draft Deadline: July the 6th, 2020 9. Specific Topic Groups and Suggestions (to be decided in class): Required Action: the key references provided below is incomplete and often out of date. All AcF 701 participants are required to explore all new references related to the chosen topics. All new references or readings should come from approved reading list (to be distributed in the first class), plus reports/studies from top practitioner or organizations (e.g. AQR Research, Bridgewater, J.P. Morgan, Fidelity, McKinsey, Blackrock, Vanguard, DFA). A: Factor Investing and Downside Risk Target: building on the state-of-art research on Value and Momentum investing, teams are required to comprehensively analyze one dimension (see below, e.g. momentum, value or size); justify how different market nature/characteristics/conditions would affect quality and value investing practices, AcF 701 – © Associate Professor George Wang 2020 Page 6 provide reasonable and well justified improvement (e.g. which fundamental variables to use) of the chosen investment strategy; present a in-depth understanding of factor investment strategies, especially the role of downside risk. A1: Momentum and Downside Risk (US/UK): Momentum investing has been one of the central investment strategies in Wall Street and London’s finance industry. A simple version of momentum trading strategy, which buys recent winners and short sells recent losers, generates considerable profits. The momentum effect has prevailed geographically and temporally. Momentum Teams should analyze the relation between downside risk and momentum profits using creative ways. You are also expected to examine the nature of momentum profits across business cycle and provide strong economic rationales and reasoning for your findings. Ambitious members should also examine the different nature and effectiveness of momentum based strategy across multiple industries and examine on which industries that momentum strategy is most profitable and stable across business cycle. All teams should examine its relevance and nature mong large, medium and small size companies. Key references: Ang, Chen and Xing (2006, RFS), Asness, Moskowitz and Pedersen (2013, JFE) A2: Value and Downside Risk / Business Cycle (US/China): this is a fundamental analysis team focusing on the relation of F-score or Graham and Dodd value formula and stock returns. Teams should analyze value based strategy on multiple industries and examine on which industries that value strategy is most profitable and stable. Creative indicators of value or quality is highly encouraged. Every member should analyze its relevance with size and provide compressive economic rationales for your findings and examine its relevance with downside risk. Key references: Ang, Chen and Xing (2006, RFS), Liu, Stambaugh and Yuan (2019, JFE), Piotroski (2000, JAR), Piotroski and So (2012, RFS), Lee and So (2014, Foundations and Trends in Accounting) A3: Size and Downside Risk / Business Cycle (China, US): this is a fundamental analysis team focusing on the relation between size and stock returns. Teams should analyze size based strategy on multiple industries and examine on which industries that size strategy is most profitable and stable. Every member should analyze its relevance with quality indicators and explore what kind of quality indicators could further enhance the returns. Jiang, Qi and Tang (2018, JBF), Liu, Stambaugh and Yuan (2019, JFE) A4: Stock Network, Financial Crisis (US): resources to be confirmed in class B: Investment Funds and Impact of Liquidity Crisis Target: The equity mutual fund industry manages more than 30 trillion dollars of wealth today. Mutual fund failure/distress (i.e. large losses or closure) would not only cause disastrous consequences of investors’ and society’s wealth, but also originate serious instability in the whole financial system. Building on the recent research on the consequences of fire sales of distressed funds, investment fund teams should examine all possible early warning signals of distressed mutual funds. Or that teams could utilize the newest textual techniques to analyze mutual fund 13F filings and shareholders report through the EDGAR system. B1: Mutual Fund Flows, Fire Sales, and Stock Returns (US, UK): Teams could examine whether AcF 701 – © Associate Professor George Wang 2020 Page 7 mutual fund outflows (distressed funds), liquidity, turnover, style shifting, cash position, gambling and risk taking behavior could effectively predict mutual fund failure or large losses (e.g. fire sales). Teams should examine the relation between fund flows and performance. Every member is expected to provide strong economic rationales and reasoning for your findings. Key references: Coval and Stafford (2007, JFE), Chen, Hansen, Hong and Stein (2008, working paper), Chen, Goldstein and Jiang (2010, JFE), Kim (2017, AFA paper), B2: Best Ideas of Fund Managers, Industry Concentration Across Business Cycles (US): Teams should build on the recent research on identifying fund managers’ best ideas (i.e. proxy for private information) and investigate the effectiveness of relevant proxies. Teams could probably think about what kind of investment is a mutual fund managers’ worst investment and how to identify such serious mistakes ex-post or ex-ante. Every member is expected to provide strong economic rationales and reasoning for your findings. Key references: Cohen, Polk and Silli (2010) References Ang, A. , Chen, J. , Xing, Y. , 2006. Downside risk. Rev. Financial Stud. 19 (4), 1191–1239 . Asness, Cliff, Andrea Frazzini, Lasse Heje Pedersen.2015. Quality minus junk. AQR working paper. Asness, C.S.; Moskowitz, T.J.; and Pedersen, L.H., 2013. Value and Momentum everywhere. Journal of Finance, 68(3), 929–985. Matthias M M Buehlmaier, Toni M Whited, 2018, Are Financial Constraints Priced? Evidence from Textual Analysis, The Review of Financial Studies, Volume 31, Issue 7, July 2018, Pages 2693– 2728, Ball, R., Gerakos J., Linnainmaa J. T., and Nikolaev V. 2016. Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of Financial Economics 121:28–45. Campbell J, Hilscher J, Szilagyi J. In Search of Distress Risk, Journal of Finance, 2008, vol. 63 6(pg. 2899-2939) Chen, Qi, Itay Goldstein, Wei Jiang, Payoff complementarities and financial fragility: Evidence from mutual fund outflows, Journal of Financial Economics, Volume 97, Issue 2, 2010, Pages 239- 262, Cohen Lauren, Karl Diether, Christopher Malloy, Misvaluing Innovation, The Review of Financial Studies, Volume 26, Issue 3, March 2013, Pages 635–666, https://doi.org/10.1093/rfs/hhs183 Cohen, Randolph B. and Polk, Christopher and Silli, Bernhard, Best Ideas (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1364827 or http://dx.doi.org/10.2139/ssrn.1364827 Coval J, Stafford E. 2007. Asset fire sales (and purchases) in equity markets. Journal of Financial Economics. 86(2):479–512 Da, Zhi, Umit G. Gurun, and Mitch Warachka (2014) Frog in the pan: Continuous information and momentum. Review of Financial Studies 27, 2171–2218. Daniel, Kent, and Tobias Moskowitz, 2015, Momentum Crashes, Journal of Finance Fama, E.F. and K.R. French, 2012. Size, value, and momentum in international stock returns. Journal of Financial Economics 105 p. 457-472. AcF 701 – © Associate Professor George Wang 2020 Page 8 Griffin, John M., and Lemmon, Michael L., 2002, Book-to-market equity, distress risk, and stock returns, Journal of Finance 57, 2317– 2336. Gupta, Tarun, and Bryan Kelly. 2019, "Factor momentum everywhere." The Journal of Portfolio Management 45.3: 13-36. Israel, Ronen, and Tobias Moskowitz, 2014, The Role of Shorting, Firm Size, and Time on Market Anomalies. Journal of Financial Economics. Jegadeesh, N., and Titman, S., 1993. Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance, 48(1), 65-91. Jiang, F., Qi, X., & Tang, G. (2018). Q-theory, mispricing, and profitability premium: Evidence from China. Journal of Banking & Finance, 87, 135-149. Jiang, F., Joshua Lee, Xiumin Martin, Guofu Zhou, 2019, Manager sentiment and stock returns, Journal of Financial Economics, Volume 132, Issue 1, 2019, Pages 126-149, Kim, Daniel, 2016, Size Premium, Distress Risk and Distress Anomaly, AFA working paper, https://pdfs.semanticscholar.org/85e9/2e60837a7689360a0bdea951c8655384ff98.pdf Li, F. Annual Report Readability, Current Earnings, and Earnings Persistence. Journal of Accounting and Economics 45 ( 2008): 221– 47. Liu, J, R.F. Stambaugh, Y. Yuan, Size and Value in China, 2019, Journal of Financial Economics, forthcoming LOU, D. 2012. A flow-based explanation for return predictability. Review of financial studies, 25, 3457-3489. Novy-Marx, Robert (2013) The other side of value: The gross profitability premium. Journal of Financial Economics 108(1), 1–28. On profitability factor. Novy-Marx, R. 2014. The quality dimension of value investing. Working Paper. Piotroski J. 2000. Value investing: the use of historical financial statement information to separate winners from losers. Journal of Accounting Research 38:1–41. Piotroski, J, and E.C. So, 2012 Identifying expectation errors in value/glamour strategies: a fundamental analysis approach, Review of Financial Studies, 25, pp. 2841-2875
