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 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

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7 “Post-Merger Performance of Acquiring Firms” Anup Agrawal et al., Journal of Finance, Sept 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, 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