Fabrice Riva

Associate Professor in Finance - Co-head of Master 104, Université Paris - Dauphine

Investissements et marchés financiers

Les objectifs du cours

The structure of European Stock Exchanges has been considerably evolving over the last 20 years. These evolutions have been fostered by the progress made in information technologies and the changes in the European regulatory environment. Open-outcry markets have been progressively replaced by computer-assisted trading markets. As a consequence, stocks can now be traded continuously, new trading protocols such as MTF (Multilateral Trading Facilities) have emerged, remote access to markets has been made possible and trading costs have experienced a dramatic decline. The financial intermediation profession has been evolving too. ISD (Investment Services Directive) constitutes a major change for the European regulatory environment. The concentration of orders on a single stock exchange is no longer mandatory and former national monopolistic stock exchanges - including Euronext - must now compete with new entrants. To gain understanding in the recent trends that characterize the stock exchange industry it is important to understand where transaction costs (both explicit and implicit) and liquidity arise from. This will be the subject of the first part of the course with a particular focus on the evolution of the Paris, London and Frankfurt stock exchanges.

How do investor account for risk in their investment decisions? This was the topic of H. Markowitz groundbreaking 1952’s article (Nobel prize in 1990). Risk-averse investors require an additional return as a compensation for risk-taking. In part 2, we analyze the effects of portfolio diversification (both naïve and optimal) and how risk is priced in equilibrium (CAPM – Capital Asset Pricing Model).

Part 3 analyzes how information is incorporated into prices. The erratic behavior of stock prices may cast doubt about their actual meaning. Do stock prices convey valuable information? Is there an incentive for firms to be publicly-traded? On an informationallyefficient market, the expected gain from price forecasts is equal to 0. Is it the case? Although there exist so-called market anomalies (abnormal returns), further examination of abnormal returns shows that these arise as a form of compensation for hidden costs (transaction costs, information costs) and risks.

Part 4 is more practical as it illustrates how the concepts developed in parts 1 to 3 can be used by decision makers. We will focus on investment decision, financing decision and portfolio managers performance measurement.

Plan du cours

Introduction : Financial markets and portfolio management

PART I: European stock exchanges

• Relative size of european markets
• The electronic order book
• The bid-ask spread and its determinants

PART 2: Risk and return

• Portfolio management : basic toolbox
• Principles of portfolio management
• Financial theory : an introduction

PART 3: Market efficiency and price anomalies

• Efficiency and forecasting
• Event-study and price response to unanticipated events
• Market anomalies
• Price, dividends and dividend policy

PART 4: Applications

• Performance measurement
• Capm and the cost of capital
• Investment decision

Bibliographie

Class handouts are downloadable from the course website: www.dauphinefinance.com

Hamon J., 2008, « Bourse et gestion de portefeuille », Economica, 3è édition.

Hamon J. et B. Jacquillat, 2008, « La bourse », Que Sais-je ? PUF, n° 825, 4è édition. Riva F., 2008, « Applications financières sous excel en visual basic », Economica, 3è édition.

Bodie Z., A. Kane, A. Marcus, 2008, Investments, Mc Graw Hill, 7è édition.

Benninga S., 2008, Financial Modeling, 3rd ed

Grinblatt M. and S. Titman, 2001, Financial markets and corporate strategy, Irwin-Mc Graw Hill, 2è édition

Copeland T. E., J.F. Weston and Kuldeep Shastri, 2005, "Financial theory and corporate policy", Addisson Wesley, 4è édition.

Dumas B. et B. Allaz, 1995, « Les titres financiers : équilibre du marché et méthodes d’évaluation », PUF.

Jacquillat B., B. Solnik et C. Pérignon, 2009, « Marchés financiers : gestion de portefeuille et des risques », Dunod, 5è édition.

Dubois M et I. Girerd-Potin, 2001, « Exercices », DeBoeck

Viviani J.L., 1997, Gestion de portefeuille, Dunod.

Broquet C., R. Cobbaut, R. Gillet et A. Van Den Berg, 2004, Gestion de portefeuille, Edition de Boeck, 4è édition.

Examen

13 3-hour classes. Practical examples and solutions to exercises in class.
Three different groups: Juan Raposo, Fabrice Riva (in English) and Jacques Hamon
Grading: mid-term and final exam (50% each).