8/3/2019 Student Proposed Final Exam Questions

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•  ProvideargumentswhypaperKamstra,Kramer,Levi(2003)arenotcorrect

•  Arestockpricesstrongefficient?

•  Provide3examplesofbehavioralbiases.

•  AccordingtoModiglianiMillerhowshouldcompanybalancefinancingthoughtdebtandequity?

•  Whyinthiscoursedowetalkonlyaboutreturns,butdonotlooktostockprices?

Questions:

1.  You need to evaluate abnormal returns. First, you have to choose the way to

evaluatenormalreturns–returns,whichwouldemergeintheabsenceoftheevent.

Suggestacriteriontochooseamongafittedvaluefromafactormodel,rollingmean

onthepastndaysandmarketportfolio.

2.  Ifnotfullyrationalagentsarepresentinthemarket,thenpricesareincorrect.Soas

a rationalinvestoryou shouldperformbetter than irrationalguys.Or no?Explainandprovideanexampleifpossible.

3.  Confrontdividendsandrepurchases.Whydividends?Whyrepurchases?

4.  Whatarethetwocharacteristicsoffirmsthatprovedtoexplainvarianceinreturns?

Do you know any attempts to test the predictig power of these factors? Their

results?

5.  What are factors? Do you know any factor models? How can we test factors’

efficiency?

Sampleanswers:

1.  A comparison of out-of-sample performance of a factor model and prediction of

rollingmeanwouldbeevidenceinfavorofoneofthese.Predictivepowerofmarket

portfolio can be tested with CAPM out-of-sample performance compared to the

otheroptions.

2.  Notcertainlyrational investorswilloutperform. First, thereare limits toarbitrage.

Second,ifalltheothersareirrational,thenyouwillprobablyneedyearsandbillions

of$tospendshortingbeforeyougain.

3.  Lectureslides.

4.  Book-to-marketandsize.Fama-Frenchthreefactorsmodel.GRStestrejectedtheir

predictivepower.

5.  Lectureslides.

1.  WhatarethefactorsthatareusedtotestICAPMandAPT?Provideexamplesofsuchfactors,

whichwereusedinthepapers.

2.  Explain,whydifferentresearches,focusingonforecastingfuturereturnsshoweddifferent,even

contradictoryresults?

3.  WhatfactorsdrivetheIsraelicompaniesmakeIPOonNASDAQ?WhytheydonotdoitonTASE?

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4.  Whicharethemostpreferabletypesofraisingfinanceforacompany?Orderthemfromthe

besttotheworst?Whatarethefactorsthatrestrictacompanytorefuseonetypeinfavorof

theanotheronemoreexpensiveone?

5.  Whatisthelogicofthe“filterrule”proposedintheWallStreetJournal?Isitsensible?Doesthis

methodwork?

6.  DiscusstheBook-toMarketAnomaly.Arethereanypuzzles?

7.  Whatreturnsdoyouexpectontheportfolios,madebyoneweekcontrarianprofitsinthe

swiftlygrowingdevelopingeconomicslikeMalaysia,SouthAfricaorIsrael?

QuestionsonEventStudy1)  Please,namethreemajorversionsoftheefficient-markethypothesis(EMH)andprovideshort

definitionforeachofthem.

2)  Please,listthesevenstepsofaneventstudy.

3)  Whycashflowinformationisbelievedtobemoreusefulthanearningsinformationinevent

study?

4)  Please,listthreemodelsforcalculatingnormalreturn.

5)  Whatis“Fridayeffect”inearningsurprisesaccordingtoDella,VignaandPollet(2006)?

1.Whatisinsidertrading?Howdoesitaffectmarketefficiency?

2.Formulatethepeckingorderhypothesis.Doesitholdinreality?

3.Describethefollowingagencyproblems:underinvestment,riskshifting,milkingtheproperty.

4.Whatistheempiricalevidenceaboutcostsofdividendsasasignal?5.Whatislossaversion?Howisitrelatedtoriskattitude?

8/3/2019 Student Proposed Final Exam Questions

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1. Comment on the claims

• “Every form of the market efficiency is welfare improving.”

• “A stock is worth what you can sell it for. This explains momentum.”

• “The Modigliani and Miller result on the capital structure is irrelevant for those not

in academia because the assumptions of their theorem never hold in practice.”2. Explain the intuition behind the Fama-MacBeth approach. What is (are) our primary

object(s) of interest? What is the economic interpretation of the coefficients estimated ina cross-sectional regression? Why do we run many moving-window regressions instead of  just one over the whole sample?

3. Consider the Gibbons-Ross-Shanken test of mean-variance efficiency

Ri,t −Rf,t = αi + βi (Rm,t −Rf,t) + εi,t, i = 1, N , t = 1, T 

F  =T −N − 1

N 1 +

µ̂2

Rm−Rf 

σ̂2

Rm−Rf 

−1

α̂Σ̂−1α̂

• Formulate the appropriate null hypothesis. Is the portfolio m mean-variance efficientunder the null? What assumptions regarding the preferences of investors and (or)the distribution of the error term do you make? Is the test exact or asymptotic?

• “In the presence of heteroskedasticity and autocorrelation, robust estimation of Σdelivers a correct size of the GRS-test.” Comment.

• Why might we be interested in testing for mean-variance efficiency of a given port-folio?

4. You run an event study of an earnings-per-share announcement effect on the value of acompany. On the 28th March 2003, both Gazprom Neft and Surgutneftegaz made suchannouncements. You include them in your sample along with 18 other events and planto run the four parametric tests based on CARs and SCARs in a conventional manner.Some weird econometrician says that your approach is not exactly right. What is yourmistake (if any)? How can you correct the mistake (or the weird)?

5. What are limits to arbitrage? Do they matter for speculators and investors? Why, whynot? How are they related to behavioral biases?

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