MF-852 Financial Econometrics

1. MF-852 Financial Econometrics Lecture 12 Case Studies in Financial Econometrics Roy J. Epstein Fall 2003

2. Articles to be Discussed • Futures Markets • “Orange Juice and Weather” • Mergers and Value Creation • “Post-Merger Performance of Acquiring Firms” • Beyond Beta • “Common Risk Factors in the Returns of Stocks and Bonds”

3. “Orange Juice and Weather” • Richard Roll, American Economic Review, Dec. 1984 • Analyzed returns on futures contracts for frozen concentrated orange juice. • Market price of OJ affected by weather, especially cold temperatures. • Futures markets predict cold weather in Florida more efficiently than the National Weather Service.

4. “Orange Juice and Weather” • Model specification and interpretation of coefficients • Market detail: importance of limit moves in futures prices • Significance levels • Use of dummy variables

5. Notes on Roll

6. Notes on Roll

7. “Post-Merger Performance of Acquiring Firms” • Anup Agrawal et al., Journal of Finance, Sept. 1992. • Analyzed stock price returns for acquiring firms before and after merger. • Stockholders of acquiring firms on average lose about 10% over the 5 years after the merger.

8. “Post-Merger Performance of Acquiring Firms” • Use of beta to calculate “abnormal” returns • Firm-size effects on returns • Time-series variation in beta • Importance of sample period • Interpretation of results

9. Notes on Agarwal

10. Notes on Agarwal

11. “Common Risk Factors in the Returns of Stocks and Bonds” • Eugene Fama and Ken French, Journal of Financial Economics, 1993. • Critique of standard CAPM and estimation of beta. • Finds additional risk factors related to firm size and ratio of book value to market value.

12. “Common Risk Factors in the Returns of Stocks and Bonds” • Definition of variables • Use of regression to “orthogonalize” data • Stratification of sample data • Interpretation of results

13. Notes on Fama/French

14. Notes on Fama/French