Scientific Methods in Finance

FIN536 Scientific Methods in Finance

Autumn 2018

  • Topics

    This course has four parts as follows.

    Part I: Philosophy of Science and Ethics in Finance Research

    • Philosophy of science. Is Finance a science? Ethics in finance research.
    • Thaler (2010); Podsakoff et al. (2012 ARP), Ferreira et al. (2014 JBR); Schäffer et al. (2011);

    Part II: Financial Theory - The Building Blocks of Finance Research

    • From general equilibrium to partial equilibrium.
    • Rational and irrational, behavioral finance; expected utility vs. non-expected utility; rational expectation; prospect theory.
    • Market efficiency and perfection: efficient vs. inefficient; perfect market and imperfect market. Principal-agent problems and financial contracting, e.g. Jensen and Meckling (1976 JFE), Myers (1977 JFE), Stiglitz and Wiess (1981 AER); Bolton and Scarfstein (1990); Hart (2001 JEL); Aghion and Bolton (1992 RES), Roberts and Sufi (2009), Shleifer and Vishny (1997 JF).
    • Financial intermediation, e.g. Diamond and Dybvig (1983 JPE), Diamond (1984 RES); Allen and Gale (2000 JPE). Recent developments: Gorton and Souleles (2005 NBER); Shleifer and Vishny (2010 JFE); Gennailoi, Shleifer and Vishny (2013 JF).
    • Games, IO and some applications in finance: Prison`s dilemma; a few famous games.

     Part III: Empirical Methods - Recent Applications

    • Introduction to Data Sources for Research in Finance
      • International databases: Compustat, CRSP, SDC Securities, M&As, etc.
      • Norwegian databases
      • Hand-collected data
    • Causality and Endogeneity: Omitted variables; Selection bias; Reverse causality; Measurement error
    • Instrumental variables (IV)
    • Regression discontinuity design (RDD)
    • Matching estimators (ME)
    • Natural experiments

    Part IV: How to Develop a Paper? From Zero to Submissions

    In this part, we completely replicate a current working paper, and the experience and lessons when developing the paper. In particular,

    • Ideas and early explorations; empirical observations and implications.
    • How did I get coauthors of the project? Why do I invite them? Cooperation among coauthors (data work, design of the tables, writing, intro and abstract)
    • Hypotheses development; empirical design; data sources; sample selection; measures and variables; preliminary results; interpretations; endogeneity concerns; steps to address these concerns
    • First draft: motivation, hypothesis, empirical tests, references, tables and figures, other appendix
    • Distribution plan: online posting; conferences; seminars; Issuing as a working paper
    • Comments, inputs, and new ideas and tests; new drafts; changes of the positioning of the paper
    • Submissions: submission strategy; referee reports; etc.

  • Learning outcome

    The candidate should, on successfully completing the course, be able to:

    Knowledge:

    • Be aware of the philosophy of science and the important ethic issues in research.
    • Have an in-depth understanding of the building blocks in the theory of finance. In particular, we discuss several seminar papers and some new developments in the field.
    • Have an in-depth understanding of the widely used empirical methods in finance. In particular, we look into several recently published papers as examples.
    • Have an in-depth understanding of the important steps to develop a paper: from theory to hypotheses, empirical design, measures, regressions, results and interpretation, addressing endogeneity issues, tables and figures, references, others.

    Skills:

    • Use the theory and empirical methods in this course to develop a research project.
    • Structure and write a finance paper.
    • Use Stata and Latex in developing a research project.

    Competence:

    • Learn how to do independent research in finance.

  • Teaching

    PhD in Finance

  • Recommended prerequisites

    Advanced master-level courses such as microeconomics, asset pricing, investment, corporate finance, and econometrics.

  • Requirements for course approval

    Class participation; successfully replicate the project provided by the lecturer

  • Assessment

    Replicate academic papers and write a term paper individually.Class participation.

    • Class participation (20%)
    • Replication of the given paper (30%)
    • Term paper linked to topics in the course and presentation (50%)

  • Grading Scale

    Grading scale A - F, based on:

    • Class participation (20%)
    • Replication of the given paper (30%)
    • Term paper linked to topics in the course and presentation (50%)

  • Computer tools

    STATA, Latex

  • Literature

    No textbook. The course is based on academic articles assigned by the lecturer.

Overview

ECTS Credits
7.5
Teaching language
English
Semester

Autumn. Offered Autumn 2018

Course responsible

Assistant Professor Xunhua Su, Department of Finance, NHH