ECON 400/400G  371

Spring 2015

Course Policies

Course Calendar & Readings

External Sites:

Federal Reserve Info:
Federal Reserve System Article Search Engine / FRB of New York / FRB of St. Louis /   Index of SEC Rules  /

Fama-French Forum/   John Cochrane CGSB Site/ Xavier Gabaix NYU Site/ Streetwise Professor/

Current Data
Bloomberg       Economagic Economic-Financial Data


   Dr. Brian Goff/414 Grise Hall
Phone (270)745-3855/
Last Modified: January 10, 2015
Western Kentucky University



Dr. Brian Goff
GH 414/745-3855
Office Hours for Spring 2015: MW 9:30-11:30 (appointments & drop-ins welcome other times)

To acquaint students with several current issues on the border between macroeconomics and financial economics, financial market microstructure, and financial market regulation

Selected Readings On-Line

Grading (Undergrad)
Exam I                                    =     30%
Exam II                                  =      30%
Assignments                          =       20%
Reading Quizzes                   =       10%
Total                                      =       100%
(A=90-100; B= 80-89; C= 70-79; D = 60-69;  F < 60)

Weekly Reading Quizzes:    Short, multiple choice quizzes over readings

Empirical Assignments/Presentations:
  On the empirical assignments, students should put together a short (5-10 minute) powerpoint presentation summarizing the empirical work.  The powerpoint slides should be printed and turned in.  The aim of the presentation is to summarize the material (or the most important parts of it) in ways that best communicate it to the other students using cut/past graphics, data, bullets.  Remember, more is not always better.  Clear, accurate -- keep those words in mind along with emphasizing connections to background economic ideas (this isn't journalism class, it's econ).  You are encouraged to refer to other sources that may enhance your understanding and presentation.  There will be 2 graduate teams with more difficult material (some weeks).

Exams: These will be two short answer/multiple choice tests. 

Students with disabilities who require accommodation (academic adjustments and/or auxilary aids or services) for this course must first contact the Office of Student Disability Services in DUC A-200.  Last day to drop the course with a W is listed in the WKU Academic Calendar.



COURSE OUTLINE & READINGS  (subject to changes)

Note:  If a link is dead, please email me as soon as possible.   Use Wikipedia, Investopedia, or similar sources to look up terms and concepts 
Some articles, if accessed from off-campus, require going through WKU's E-Journal  system.  Go here for instructions

Week 1 (Jan 28) Administration & Basic Ideas in MacroFinance & Market Microstructure I 
Class Administration
MacroFinance and Time Series Data Background
Using Stat Software


Assignment for Next Week:  Statistical Primer Using Gretl  and data sets 
Shiller Monthly Stock Data (Gretl)  Shiller Annual Stock Data (Gretl) 
(Use GA Assistance and Gretl Primer)

All Students:
A1) Open Gretl and become comfortable with key features (opening files, generating new variables, generating stats, opening command log, using console)
A2) Open the Shiller Monthly file, and compute real (CPI adjusted) values of SP, GDP, and PCE by multiplying each variable by the present CPI (2014=238) and dividing by the CPI in each period
A3) Generate (annual) percent changes (example: SPrpca = (SPr-SPr(-12))/SPr(-12) ) for real SP500 Index, real GDP, and real Personal Consumption Expenditures  (for small differences apx equal to d(logSPr)
A4) For the following sample periods generate summary statistics for these variables
(use the console and summary command to do them all at once)
                            1871.01-2013.12:  SPrpca
                            1947.01-2013.12: SPrpca, gdprpca, pcerpca
A5) By hand calculate the "Sharpe Ratio" of each variable = Mean/Standard Deviation
A6) Print (clearly) brief answers to the following questions on the back of your printed output
     -- What are the mean annual percent changes in these variables?
     -- How do the standard deviations compare?
     -- How do the Sharpe Ratios compare?

Grad Students:
G1) Run an OLS regression using  real SP as the dependent variable and its 1-period lag as the independent variable; Save the residuals
G2) Run a regression using the residuals as the dependent variable and their 1-period lag as the independent variable
G3) Select 3 subsample time frames (of at least 3 years); Run the real SP and its lag regression and see if you can find a period where the coefficient in the regression differs significantly from 1
G4) Generate a simulated random walk
      -- Open Gretl Console under Tools; smpl 1871.1 1871.1   >series simrw=0  > smpl 1871.2 2013.12  >genr simrw = simrw(-1) + randgen(N, 0, 1)  >smpl 1871.1 2013.12 >genr simrw = simrw + 50  (recenters to 50)
      -- Run the same regression for this variable, the ADF, and Print a time series plot for it
G5) Prepare 2-3 Powerpoint slides explaining what G1-G3 mean

Related Links:   Fama MN Fed Interview   Fama AEI Interview (starts in middle)       coin flipping                  


Week 2 (Feb 4 ) Stocks, Random Walks, and Efficient Markets
Reading Quiz: 
Efficient Capital Markets -- CEE     Cochrane on Fame and ME       Wiki on Present Value 

Related Links: Shiller Data Site     Mehra on Equity Premium       The Mismeasurement of Risk  Barro Disasters NBER  
Macro Finance Puzzles (p. 2-3 only)

Assignment for Next Week:  Shiller-Like Forecasting Regressions   Annual Stock & Bond Return Data (Gretl)     

All Students (undergrads utilize GA assistance as needed):
A1) Run a regression with SP500 annual returns in percent (spreturn)  and its one period lag
A2) Run a regression with SP500 annual returns and 1-period lag of Shiller PE ratio (peratio) as independent variable
A3) Print (clearly) brief answer to the following questions on the back of your printed output
     -- Do one month lagged returns in stock returns or one month lagged price-earnings ratios help predict current percent changes in stock returns?
     -- What does this appear to indicate about using current information to predict future stock prices?

Grad Students:
G1) Compute 5 year average SP real returns t+1 to t+5 (e.g. spreturn5 = (spreturn(1) + spreturn(2) + spreturn(3) + spreturn(4) +spreturn(5))/5  )
G2) Run regressions with 5 year average returns as the dependent variable and with Shiller's PE ratio (in current year) as the independent variable
G3) Run regressions with 5 year percent changes in earnings as dependent variable and with Shiller's PE ratio (in current year) as the independent variable
G4) Print your results and write a short explanation on the back as to what you found and what it means


Week 3 (Feb 11Beyond Random Walks, Predictability of Stock Prices
Reading Quiz:   
Cochrane on Efficient Markets Today            

Related Links:  Campbell on Long Run Returns    Short and Long Run Stock Return Behavior      Cochrane Long Run Stock Perspective   Stock Price Graphics FileRay Fair Simulation Model   Fama Minn Fed Interview    (pdf) Fama DFA Interview     Manne on Market Efficiency     Fama Long Interview        Fama   on Market Efficiency     Apple's New Normal        Ray Fair Simulation Model 

Assignment for Next Week:  Explaining Big Stock Price Movements
All Students:  10 minute Powerpoint explaining methods and results in Events That Shook The Market   (Ray Fair Yale)
Grads:  10 minute Powerpoint explaining
Rational Revolutions (Chicago GSB technical background to article )

Week 4 (Missed Due to Snow Day) 


Revised Week 5 (Feb 25)  Topics on Stock Prices
Reading Quiz:   
Bubble, Bubble (frb-stl)   Tulipmania (JSTOR link through WKU)     Vox Barro on Disasters and Equity Premium                                              

Related Links:    Bubble Regressions      Campbell Bubble in Bond Market?    Stock Market Crashes and Depressions (Barro and Ursua)      Shiller and Fama NPR Interview                       

Assignment for Next Week: Fama-Bliss Data Gretl Data               
All Students:

A1) Suppose the price of a 1 year bond is 98 and it pays nothing until the end of the 1 year, show how to calculate its yield (interest) rate (wiki)
A2) Compute summary statistics on 1 year bond return (returntb1), 10 year bond return (returntb10yr), and SP 500 (returnsp) measured as nominal annual percent changes
A3) Generate a time plot of these series

A4) Generate
the correlation coefficient between these three variables
A4) Print the output and summarize the relationships

Graduate Students:

Generate a time plot of y1, y2, f2, f2y1 yy21   
G2) On back of plot, draw a simple graphic illustrating the meaning of y1, y2, f2

(Note: y1 = actual 1 yr rate; y2=actual 2 year rate; f2 = implied 1 year rate in year)
(Note: f2y1 = difference in f2 and y1; meaning the difference in implied 1 year rate in year 2 and actual 1 year rate)
(Note: yy21=difference in y2 and y1; meaning the difference in actual 2 year rate and actual 1 year rate)


Revised Week 6 (Mar 4Interest Rates, The Term Structure, and Risk
Reading Quiz: 
Bond Valuation    Understanding the Term Structure of Interest Rates  (StL Fed)   Wiki on Yield Curve    Wiki on Forward Rates     

Related Links:  Cochrane Notes   Is There A Bubble in the Bond Market (Campbell)  
                                STL Fed Monetary Trends    Campbell Risk and Returns Stocks and Bonds Slides       STL Fed Monetary Trends   Forward Rates Excel File

In Class Empirical Studies (not part of assignment)

-- Regress yy21 as dependent variable on f2y1 as independent
-- Regress yy51 as dependent variable on f5y1 as independent

-- Before Fama-Bliss, the expected coefficients on the regressions above were 1.0 with high R2
-- After Fama-Bliss ...
G4)  Prepare a few slides explaining your explorations

-- Regress rx2 as dependent variable on fy21 

-- Regress rx5 as dependent variable on fy51

-- Comparing Estimates of Risk Premia   e400 Return and Risk Premia Data



Week 7 (Mar 11) Spring Break


Week 8 (Mar 18Exam I

Week 9 (March 25) Debt Basics & Background
Reading Quiz: 800 Years of Financial Folly  (VoxEU)   Modigliani-Miller Theorem  (Wiki)     Cochrane Model of Govt Liabilities

Related Links:  Debt Basics PPT    Crisis of 2008 PPT 

Assignment for Next Week: Cross Country Interest Rates & Debt/GDP Ratios
OECD MacroFinance Data   (Excel File with explanation of Country Codes)      

Note:  The OECD data file is a panel data 1961-2013 for OECD members (included only in years of membership).  It merges (some) variables from IMF's World Economic Outlook database,  World Bank World Development Indicators database and Global Financial Development database.  This last one (GFDD) is the most useful on this assignment.  In the Gretl file, these variables have names from data11 to data104 and appear at the bottom of the datafile.  All variables have labels.  Gretl doesn't handle text input so Country Codes are just numbers in the Gretl file.  Names appear with Codes in the Excel file. 

All Students
A1) Generate time series plot of the Debt/GDP ratios for the US, Japan, Italy, Spain, France, Germany, Greece  (use variable #133 in Gretl file)

Grad Students
G1) Run a regression for country interest rate on long run bonds (variable #212)
imitating the one in Hamilton's fiscal tipping points (Debt/GDP, Debt/GDP^2, Current Account/GDP, CA/GDP^2) 
          Current Account to GDP is variable #121
G2) Run the regression again but put in country specific dummy variables (country fixed effect)
G2) Generate a PPT presentation of your results and address these questions:
          -- why use the square of debt/GDP?
          -- what role does the country fixed effect play?
          -- how do the results change with country effects?

Week 10
(April 1) Sovereign Debt & Fiscal Tipping Points/Risks in U.S.
Reading Quiz: 
  Fiscal Tipping Points    US Looming Disaster   US

Related Links:  S&P Global Credit Risk Report       Goff PPT on Crisis             

Assignment for Next Week:
All Students:  Find Current Debt GDP Ratios, Deficit GDP ratios, 5 year CDS prices and probability of default (S&P Global Credit Risk Report), and Current 10 year bond rates for
US, Japan, Germany, France, Italy, and Spain     


Week 11 (April 8) Assessing Current/Future Global Risks from Debt

 Reading Quiz:  US   EU  Japan   Bass Chicago CGSB Video

Related Links:    S&P Global Credit Risk Report     SoberLook 1  SoberLook2     Predicting Sovereign Debt Crisis

Week 12 (April 15) Assessing Risks to U.S. States from Fiscal Imbalance
Reading Quiz:   America's Greece (Economist)   Joshua Rauh Podcast                                 

Related Links: S&P State Ratings over Time  State Ratings Map     Rauh & Novy-Marx NBER on States   Crisis in Local Pensions (Rauh) 
                           Excel File with Kentucky Data   Needed Quantity of Govt Debt (Prescott) 

Assignment for Next Week:     Interest Rate Data              
All Students:
A1) Compute changes differences in the yield curve (10 year Treasury Bond rate minus) 1 year Treasury rate
A2) Generate a time series plot of annualized percent changes in industrial production (indpropca), the term difference variable from step 1, and recessions

Grad Students
G1) Restrict the sample to periods where the recession variable equals 1 and then with recession variable equals 0
G2) Recompute the the summary statistics and correlations for these the recession and non-recession sub-samples
G3) Compute the correlation matrix for the various risk premia variables (see labels) 
Regress recession as the dependent variable against each of the risk premia  variables 
G3) Print the output and summarize the differences in relationships between these variables in recession and non-recession periods and the regression evidence


Week 13 (Apr 22) Yield Curve Spreads as Key Market Signals
Reading Quiz: Yield Curve (Wiki through relationship to business cycle)   Decoding Messages (Richmond Fed)

Related Links: Yield Curve as Predictor of Recessions (NY Fed)  

Assignment for Next Week: Rent-Sales Price Ratio, Gold-Silver Prices   Housing Data  
(The housing data is from Shiller.  It lists a housing price index (HPI) and rental price index (CPIRENT) for 1914-2013)

All Students:

A1)  Compute a time plot of housing price index and rental price index (on same plot)
A2) Compute a housing price to rent price ratio using 1980 as the base year (ratio = 100 for 1980)
A3) Compute a gold to silver price ratio using 1980 as the base year again
A4) Generate time plots for the price-rent and for gold-silver price ratios (separate graphs)

    -- Print answers to the following questions on the back of the printed output:
    -- When are these ratios unusually high and low?
    --  How did the gold-price ratio behave before, during, and after the financial crisis of the fall of 2008?

Grad Students:    
Gold Silver Data
The metal prices data is monthly from 1968.1 to 2014.1.  It lists prices of gold and silver in dollars per ounce)

G1) Generate a time plot of gold prices and silver prices (on same plot)
G2) Regress the log of silver prices as the dependent variable with the log of gold prices as the dependent variable; save the residuals     

G3) Plot the residuals
G4) Regress the residuals on their one period lagged values
G5) Using the plots for all students, the estimates in steps 1-3, as well as adding other variables to the data set,
    -- when are gold prices high relative to silver and vice versa?
   --  do the residuals tend to return to zero?
   -- does changing the time frame make any difference?
   -- are the residuals predictable by some other variable?
G6) Generate a 10 min PPT explaining your findings and answers

Week 14 (Apr 29 Spreads and Ratios as Key Market Signals
Reading Quiz: Arbitrage (Wiki to section on "Types")   Cointegration (Wiki)   Manhattan Prices & Rents (NY Fed)

Week 15 (May 6)  Exam II   



Week 16   Finals  

Does Fed Control Rates (Fama)

FRB Boston Why So Many Bad Real Estate Decisions?      Hamilton May 08     Dallas Fed on Real Estate Prices         More Dallas Fed (Grad Only)                  

Related Links:   Error Correction Model of M2 Richmond Fed    Gold Silver Price Rent Graphics  

Topics in Market Microstructure: Market Making, Transactions Costs, Bid-Ask Spread
Reading Quiz:  Wiki Market Maker  Bid Ask Spread    NYSE    CBOT   Bond Market   Foreign Exchange Market   FIX 

Jenkins:  What do Shareholders maximize

Related Links:  NYSE    CME Group  Yahoo Finance 

Assignment for Next Week:

Grad Students:
G1) Select one of the 3 items below.  Prepare a 10 minute PPT presentation explaining the issue and the economics behind it.  You may work in 2 person teams.  I have listed links as starting points.  You should do some investigative work from there

-- Futures Market Speculation and Spot Price Bubbles  Streetwise Professor   and Econbrowser (James Hamilton) for posts between 2008 and 2012
-- Centralized Clearing     
Streetwise Professor   for posts over last 6 years (look under counterparty risk also)    Hamilton June 08Hamilton (Nov 09)              
-- Front-Running   WSJ Book Review     Streetwise Professor  
-- Insider Trading Restrictions  
Insider Trading Debates  + CEE on Insider Trading 

Assignment for Next Week:  Measuring Financialization and Its Impact  OECD MacroFinance Data   (Excel File with Country Codes)   

All Students
1) Generate a time series plot of data103 (stock market capitalization to GDP) for US, UK, Iceland, and one country of your choosing
Grad Students
G1) Construct two measures of the degree of financialization of an economy (services-based, asset or liability based)
G2) Using plots, summary stats, and/or regressions, show how the financial crisis of 2008 impacted countries with low, medium, and high degrees of financialization (by one of your measures)

Related Links:  Related Links: S&P Global Credit Risk Report    Predicting Sovereign Debt Crisis    Goff PPT on Crisis   Modigliani-Miller     Japan  US       SoberLook 1  SoberLook2 

   Related Links: WSJ Market Data Center;   NYSE CME Grouputures  1987 Market Crash  See Wiki for Stock, Bond, Futures


Financialization and Debt (How Much Is Too Much)
Reading Quiz: 
Cochrane on Financialization   Crisis & Finanicalization in UK, US, Iceland     Jenkins on Cyprus      

Monthly Interest Rates






Related Links:  Crisis Timeline   Goff PPT on Crisis   Systemic Risk & Financial Crisis   Bubbles or How Unusual Stock Market of 2008  Crisis and Bank Opaqueness

Demographic Shifts and Markets
Key Questions: What impacts will demographic shifts have on asset values?
                         How accurate are long run demographic predictions?

Data on Demographics and Stock Values:    Vox Demographics and Stock Predictability +  "Future Shock" + Milken Rebuttal  

 The Search for Safe Assets
Key Questions:  What assets do people seek out when markets are troubled?
                           What are attributes of these assets that are common and what are different (up/down movements; variance; ...)?

Beckworth Post 

Search out references on forces behind gold and silver prices; Present data on movements of these series (and their ratio and difference); examine the cointegration of these time series (be careful with unit of time);

Key Questions:  Did the financial industry grow too large?
                          What changes to the financial industry might best reduces changes of future bubbles/crashes?

See as well as WSJ article on Cyprus that I sent by Holman Jenkins; Explore/examine World Financialization Data


   CBO Budget Outlook to 2012       Conference on Looming Fiscal Crisis       Unpleasant Monetarist Arithmetic (Cochrane) 
Needed Quantity of Government Debt (Prescott) Barro on Ricardian Equivalence

   FRB Richmond Econ of Sovereign Defaults 

 Jenkins WSJ - None Dare Call it Default    Monetary Challenges         Unpleasant Monetarist Arithmetic (Cochrane)


Why are FX rates hard to predict or explain?


Fx Rates:   Why are FX Rates Hard to Predict +  FX Rate Conundrum     Micro-Macro Disconnect and PPP    or    Can Oil Prices Forecast Exchange Rates 

Related Links:  Rational Speculation & Exchange Rates  (JME)  
  Conflicts and Commodity Prices        Exchange Rates and Business Cycles   


MacroFinance Policy Issues & Questions
Key Questons: 

Assignments/Presentations:  Undergrads read 3 of following articles.  Grad students read all plus Robust Capital.  Assemble a 10 minute PPT that addresses 1) source(s) of 2008 crash; 2) Fed reactions to crash; 3) Future Policy Changes/Improvements.   Don't simply do a summary.  Read/assess/weigh the points and try to come to your own conclusions

 Boston Fed President on Crisis & Policy        William Poole Key Questions about Fed Actions (Book Review)    Cochrane on Financial Crisis and Policy + Hamilton Reply   
NY Fed President Lessons from the Crisis     Jenkins Next Bailout the Last   
   Taming Too Big To Fail (Dallas Fed Speech)   

Grad Student Extra:  Robust Capital Regulation  

Measuring Bank Specific Systemic Risk    Influences on Systemic Bank Risk     Fed Reactions to Crisis (Dallas Fed)



Does CEO Pay Make Economic Sense?   Is CEO Pay Really Inefficient?   CEO Pay Jenkins  (Reply to Question)  CEO Pay Reynolds 
How Sustainable/Unstustainable Is Kentucky's Long Run Fiscal Situation?  
Excel File on KY   (update for 2012;  for more info see KTRS report Financial or Actuarial

How Much Did the Size of a Nation's Financial Sector (finanialization) Matter for the 2008 crash and Why:  World Financialization Data
Examining the Relationship between Gold & Silver Prices since 2007
Relationships between Stock Prices and Commodity Prices
Similarities and Differences in the Crashes of 1929 and 2008

Ideas and Policies for Regulation of Systemic Risk:  Vox Critical Assessment Dodd-Frank    Zingales - JAcctResearch May 2009)
Do Central Banks (such as the Fed) Increase or Decrease Systemic Risk?
Insider Trading:   
Insider Trading Debates  + CEE on Insider Trading  
Convergence and Divergence in Eurozone Bond Spreads and What's Down the Road? 
Was There a Real Estate Bubble and How Would One Decide?  
   Shiller Real Estate Data
What's Been Driving Commodity Pricing:     Hamilton June 08Hamilton (Nov 09)  +  SWP Stuck on Stupid + SWP Reply to Hamilton + Vox on Financialization of Commodities      

Commodity Price Boom in Perspective     Did Easy Money Fuel Commodity Boom     


Limits on Short TransactinsOverstock.comLimits on Short TransactionsInvestopedia  
SEC Study on Marked to Market Accounting





Debates about Financial Market Regulation Part 2
Wiki Terms: Clearinghouse; Counterparty Risk;
Principal-Agent Problem
Undergrad Assignment (15 min. PPT on Core Issues in Financial Market Regulation & Analysis of Dodd-Frank Legislation

;   Krozner Corporate Governance CEE     (SWP - Agency Problems 9-09)
Grad Assignment:  Basics of Clearinghouses and Reasons for and Against Centralized Clearinghouse System  (See above + Wiki  and  SWP - Counterparty Risk 8-09   SWP - 5-09)                       

Related Links:   
Criminalizing Agency Costs   Homan Jenkins (WSJ articles); Overview of Issues in Corprate Governance (frb-ny 2002)
Squam Lake Working Group on Financial Regulation (Clearinghouses; Overall; ...)
(SWP 1-09)