Advanced Global Asset Management


IntesaBci S.p.A.



Campbell R. Harvey
Fuqua School of Business, Duke University, Durham, NC USA
National Bureau of Economic Research, Cambridge, MA USA

September 10-13, 2001


Course Description

This course delivers the theory and the quantitative tools that are necessary for advanced application of the principals of global asset management. The focus of the course is on strategic and tactical rather than passive asset management. To this end, we develop the fundamental concepts of asset valuation in a world with time-varying risk and risk premiums. We also focus on the most recent advances quantitative forecasting methods.

The course builds on three asset allocation concepts. We begin with the strategic asset allocation decision. This is a long-term posturing. Next we discuss tactical asset allocation. This is short term changes in investment weights that capture targets of opportunities (sometimes called market timing). Finally, we focus on the bottom up decision. One unique feature of the course is that students are shown how to put a portfolio together from individual stocks (stock picking).

Video Clips

I have shot a series of short clips for both of my courses. NOTE: ALL VIDEO CLIPS ARE SERVED BY DUKE UNIVERSITY SERVERS.

Webcast

There is a webcast of many of the topics in this course. To view on demand, click here. WEBCAST of Asset Allocation Course

Copyrights

I reserve the copyright for all parts of the course. Any commerical reproduction of any course materials including lecture notes taken by students during the class is not allowed unless explicit permission is given by me.

Hypertexts

Harvey, Campbell R. 2001, Advanced Global Asset Management [Various lecture notes on INTERNET.]

Campbell, John Y. and Luis Viceira, 2000, Strategic Asset Allocation, manuscript, View PDF.

Lee, Wai, 2000, Advanced Theory and Methodology of Tactical Asset Allocation Fabozzi and Associates. View PDF.

Grinold, Richard C. and Ronald N. Kahn, 2000, Active Portfolio Management: A Quantitative Approach to Providing Superior Returns and Controling Risk, Second Edition, McGraw Hill. (approx $70)

Outline and Recommended Reading Assignments

Most of the reading for Advanced Global Asset Management will come from journal articles and working papers. I recognize that it is impossible to read all of these articles in four days. One required reading is the preparation for the case discussion on Wednesday morning. I will assign each student to a group in order to focus the discussion. I will request to have CD-ROMs pressed for distribution before class begins

Pre-class preparation

Familiarize yourself with my website.

General background

  • Short biography of instructor, Campbell R. Harvey View video. [2 minutes] NOTE: ALL VIDEO CLIPS ARE SERVED BY DUKE UNIVERSITY SERVERS.

  • Course introduction View video. [2 minutes]


1. Monday September 10: Session 1

Course overview/current economic environment

The goal of this session is to set the expectations for the course. I will review each of the topics to be covered


2. Monday September 10: Session 2

Strategic Asset Allocation

The focus is on the measurement of long-term expected returns, volatility and correlation. We will introduce the concept of tracking error. We will also examine survivorship bias. We will specifically address the question of what the expected performance of major markets will be over the next five to ten years.

  • Strategic forecasting of the US marketView pdf.

  • Historical Perspective on U.S. Asset Class Returns. [important]

  • Approaches to asset allocation. View video. [5 minutes]

  • The usefulness of dividend yield as a forecaster of long-horizon returns. View video. [3 minutes]

  • The risk free rate and mean-variance analysis. View video. [4 minutes]

  • Understanding mean-variance analysis. View video. [6 minutes]

  • U.S. Perspective. [important]

  • William N. Goetzmann, Philippe Jorion, "Global Stock Markets in the Twentieth Century," Journal of Finance, June 1999. View PDF.[important]

  • William N. Goetzmann, Philippe Jorion, "Re-emerging Markets," Journal of Finance, June 1999. View PDF.

  • John R. Graham and Campbell R. Harvey, "Expectations of equity risk premia, volatility and asymmetry from a corporate finance perspective, View PDF, 0.4mb.

  • John R. Graham and Campbell R. Harvey, "Expectations of equity risk premia, volatility and asymmetry from a corporate finance perspective, Excel files.

  • Campbell R. Harvey, "The Drivers of Expected Returns in International Markets," Emerging Markets Quarterly 2000. View PDF of final version.

3. Monday September 10: Session 3

Tactical Asset Allocation I: Expected Returns

We will focus this lecture on the development of short-term forecasting models for asset returns.

  • PredictabilityView pdf.

  • Mean variance weights with dynamic trading strategiesView pdf.

  • Building short-term tactical asset return forecasting models. View video. [3 minutes]

  • The usefulness of R-square in evaluating prediction models. View video. [4 minutes]

  • Macroeconomic vs. financial variables in asset return forecasting models. View video. [3 minutes]

  • Unconditional vs. conditional expected asset returns. View video. [4 minutes]

  • Forecasting International Asset Returns [important]

  • Risk identification regressions and prediction regressions. View htm.

  • Local versus global variables in prediction regressions. View htm.

  • Campbell R. Harvey, "Time-Varying Conditional Covariances in Tests of Asset Pricing Models," Journal of Financial Economics 24 (1989): 289-317. (P3) View PDF, 2.4mb.

  • Campbell R. Harvey, "The World Price of Covariance Risk," Journal of Finance 46 (1991): 111-157. (P10) View PDF, 4.5mb.

  • Campbell R. Harvey, "The Risk and Predictability of International Equity Returns," with Wayne Ferson, Review of Financial Studies 6 (1993) 527- 566. (P21) View PDF, 4.1mb.

  • Campbell R. Harvey, "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies (1995): 773-816. (P32) View PDF, 3.4mb. Also published as NBER working paper 4621.

  • Stefano Cavalaglia, "Industry versus country factors" View PDF.

  • Stefano Cavalaglia, D. Cho and Brian Singer, "Further evidence on global pricing" View PDF.

4. Tuesday September 11: Session 1

Tactical Asset Allocation II: Comovement, Volatility, Skewness, Estimation Error

This lecture explores the econometric techniques used for modeling volatilities and correlations. GARCH models will be explored along with alternatives such as ones based on exponentially weighted moving averages. We also investigate the implications of estimation error in portfolio selection.

  • Estimation error in portfolio selection. View pdf.

  • Approaches to Asset Management [important]

  • Unconditional vs. conditional volatility. View video. [6 minutes]

  • The specification of dynamic risk functions. View video. [8 minutes]

  • Excel program that estimates a GARCH(1,1) model. Download.

  • Campbell R. Harvey, "Forecasting International Equity Correlations," with Claude Erb and Tadas Viskanta, Financial Analysts Journal (1994): November/December 32-45. (P27) View PDF, 1.9mb.[important]

  • Campbell R. Harvey, "Do World Markets Still Serve as a Hedge?," with Claude Erb and Tadas Viskanta, Journal of Investing (1995): Fall 23-46. (P28) View PDF, 2.1mb.

  • Campbell R. Harvey, "The Cross-Section of Volatility and Autocorrelation in Emerging Markets" Finanzmarkt und Portfolio Management 9 (1995): 12-34. (P29) View PDF, 2.8mb.

  • Campbell R. Harvey, "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies (1995): 773-816. (P32) View PDF, 3.4mb. Also published as NBER working paper 4621.

  • Campbell R. Harvey, "Emerging Equity Market Volatility," with Geert Bekaert, Journal of Financial Economics (1997): 43:1, January, 29-78. (P40) [prev. W14] View PDF Also published as NBER working paper 5307.

  • Skewness movie produced by a Fuqua 1998 graduate. View video.

  • Skewness and asset management. View video. [8 minutes]

  • Campbell R. Harvey,"Autoregressive Conditional Skewness," with Akhtar Siddique, Journal of Financial and Quantitative Analysis 1999, (P54) [prev. W22] View PDF, X.Xmb.

  • Campbell R. Harvey, "Conditional Skewness in Asset Pricing Tests," with Akhtar Siddique, Journal of Finance 2000. (P56) [prev. W17] View PDF, 1.0mb.

  • Campbell R. Harvey, "The Cross-Section of Expected Risk Exposure," with Akhtar Siddique, Working paper View PDF, 1.0mb.


5. Tuesday September 11: Session 2

Asset Pricing and Asset Allocation

This lecture reviews the state of asset pricing theory, from the simple CAPM to multifactor models, in international finance. Emphasis is placed on identifying and dymamically modeling risk. We start with average or unconditional exposure and work our way to more dynamic, time-varying models.

  • Overview: asset pricing and allocation View PDF.

  • Is the world CAPM dead? View video. [8 minutes]

  • Is the variance of a well diversified portfolio the "risk"? View video. [8 minutes]

  • Possible world risk factors. View video. [8 minutes]

  • Risk models and predictive models in trading strategies. View video. [8 minutes]

  • Campbell R. Harvey, "Sources of Risk and Expected Returns in Global Equity Markets," with Wayne Ferson, Journal of Banking and Finance (1994): 775-803. (P24) View PDF, 2.6mb. Also published as NBER working paper 4622.[important]

  • Campbell R. Harvey, "The Risk Exposure of Emerging Equity Markets," World Bank Economic Review (1995): 19-50. (P30) View PDF, 2.7mb.

  • Campbell R. Harvey, "The Risk and Predictability of International Equity Returns," with Wayne Ferson, Review of Financial Studies 6 (1993) 527- 566. (P21) View PDF, 4.1mb.

  • Campbell R. Harvey, "An Exploratory Investigation of the Fundamental Determinants of National Equity Market Returns," with Wayne Ferson, in Jeffrey Frankel, Editor, The Internationalization of Equity Markets, (Chicago: University of Chicago Press, 1994, pp. 59-138). (C1) View PDF, 6.3mb Also published as NBER working paper 4595.

  • Eugene F. Fama and Kenneth R. French, 1992, "The Cross-Section of Expected Stock Returns" Journal of Finance 47, 427-465. View PDF.

  • Eugene F. Fama and Kenneth R. French, 1993, "Common Risk Factors in the Returns on Stocks and Bonds," Journal of Financial Economics 33, 3-56. View PDF.

  • Eugene F. Fama and Kenneth R. French, 1998, "Value versus growth: The international evidence" Journal of Finance View PDF.[important]

  • Campbell R. Harvey, "Conditioning Variables and the Cross-Section of Stock Returns," with Wayne Ferson, Journal of Finance 1999, 54 1325-1360. (P57) [prev. W32] View PDF, 0.2mb. Also published as NBER working paper 7009.[important]


6. Tuesday September 11: Session 3

Attributes and Asset Pricing

A number of recent research papers have examined the role of attributes and expected returns. In this lecture we develop a framework to link these attributes to expected returns.

  • Overview: predictability versus explanatory View PDF.

  • Alpha strategies. View video. [8 minutes]

  • Alpha and market efficiency. View video. [3 minutes]

  • Campbell R. Harvey, "Fundamental Determinants of International Equity Returns: A Perspective on Conditional Asset Pricing," with Wayne Ferson, Journal of Banking and Finance (1997): 21, 1625-1665. (P42)[prev. W7] View PDF, 4.2mb. Also published as NBER working paper 5860.[important]

  • Kent Daniel and Sheridan Titman, 1997, "Evidence on the Characteristics of Cross-Sectional Variation in Stock Returns" Journal of Finance 52, 1-33. View PDF.[important]

  • Eugene F. Fama and Kenneth R. French, 1992, "The Cross-Section of Expected Stock Returns" Journal of Finance 47, 427-465. View PDF.

  • Eugene F. Fama and Kenneth R. French, 1998, "Value versus growth: The international evidence" Journal of Finance View PDF.

  • Campbell R. Harvey,"Conditioning Variables and the Cross-Section of Stock Returns," with Wayne Ferson, Journal of Finance 1999, 54 1325-1360. (P57) [prev. W32] View PDF, 0.2mb. Also published as NBER working paper 7009.


7. Wednesday September 12: Session 1

Asset Management Strategy: Fixed Income and Equity

Now that we have some familiarity with the tools of asset allocation, we now explore the business strategy of asset management. The class will be divided into the core groups at the fictional firm. I will play the role of the CEO. Very important class. Be ultra prepared.

  • Asset Management Strategy Case. View PDF.

  • Asset Management Strategy Case Overview. View PDF.


8. Wednesday September 12: Session 2

Stock Selection I: Screening Programs

This lecture describes the state of the art techniques for selecting equity securities using multivariate scoring techniques.

  • Stock selection overview. View PDF.
  • Stock selection and spread portfolio construction View video. [8 minutes]

  • Stock selection and market efficiency. View video. [5 minutes]

  • Campbell R. Harvey, "Stock Selection in Emerging Markets: Portfolio Strategies for Malaysia, Mexico and South Africa" with Dana Achour, Greg Hopkins and Clive Lang, Emerging Markets Quarterly 1999, Winter, 38-91. (P53) View PDF, 6.4mb.

  • Campbell R. Harvey, "Stock Selection in Malaysia" with Dana Achour, Greg Hopkins and Clive Lang, Emerging Markets Quarterly 1999, Spring, 54-91 (P55) View PDF, 5.5mb.

  • Campbell R. Harvey, "Stock Selection in Mexico" with Dana Achour, Greg Hopkins and Clive Lang, Emerging Markets Quarterly 3, Fall 1999, 38-75. (P63) [prev. W46] View PDF, 1.1mb. View PDF of last working paper version, 0.3mb

  • Campbell R. Harvey, "Firm Characteristics and Investment Strategies in Africa: The Case of South Africa" with Dana Achour, Greg Hopkins and Clive Lang, African Finance Journal 1, 1999, 1-68. (P65) [prev. W47] View PDF of last working paper version, 0.3mb View PDF [not ready yet]

  • Geert Rouwenhorst, "Local return factors and turnover in emerging stock markets", Journal of Finance 54, 1439-1464. View PDF.

  • Geert Rouwenhorst, "International Momentum Strategies" Journal of Finance 53, 1998, 267-284. View PDF.

  • Utpal Bhattacharya and Hazem Daouk, "The World Price of Insider Trading" View PDF.[important]

  • Utpal Bhattacharya, Hazem Daouk, Brian Jorgenson and Carl-Heinrich Kehr, "When and Event is Not an Event: The Curious Case of an Emerging Market" Journal of Financial Economics, 55,1 69-102. forthcoming, View PDF.[important] [Note, need to sign up for access to North Holland web site.]


9. Wednesday September 12: Session 3

Stock Selection II: Regression Based Selection

We introduce regression type models to select stocks. We link these regressions to asset pricing theory and interpret the evidence that fundamental factors are able to identify good and bad expected returns opportunities.

  • Firm specific attribute adjustment in cross-sectional screening. View video. [5 minutes]

  • Sorting versus regression. View video. [5 minutes]

  • Multivariate attribute strategies and developing scoring screens. View video. [5 minutes]

  • Campbell R. Harvey, "Fundamental Determinants of International Equity Returns: A Perspective on Conditional Asset Pricing," with Wayne Ferson, Journal of Banking and Finance (1997): 21, 1625-1665. (P42)[prev. W7] View PDF, 4.2mb. Also published as NBER working paper 5860.[important]

10. Thursday September 13: Session 1

International Hedge Funds

The goal of this lecture is to introduce and to explain the growth in international hedge funds. We will also discuss high frequency trading strategies.

  • Campbell R. Harvey, "Forecasting Foreign Exchange Market Returns via Entropy Based Coding: The Framework," with Arman Glodjo. (W13) View PDF, 2.6mb


11. Thursday September 13, 2001: Session 2

Global Asset Management and Technology

New technology and the Internet has caused what is best referred to as a "structural" change in the asset management industry. The purpose of this session is to brainstorm the future landscape of the asset management industry.

Selected presentations:

  • Barter, Auction and Technology.Implications for Asset Management, Powerpoint

  • Forex in the Future: Implications for Asset Management Powerpoint

  • Ben Wright, Unlocking the C2C forex riddle, Pdf file

  • Course conclusions View video. [8 minutes]


Supplementary Materials

Goldman Sachs, 1999, Importance of Asset Allocation in Managing Private Equity Commitments. Robert Litterman and Kurt Winkelmann, Goldman Sachs, January 1996, Managing Market Exposure.

Robert Litterman and Kurt Winkelmann, Goldman Sachs, January 1998, Estimating Covariance Matrices.

Andrew Bevan and Kurt Winkelmann, Goldman Sachs, June 1998, Using the Black-Litterman Global Asset Allocation Model: Three Years of Practical Experience.

G. Le and Robert Litterman, Goldman Sachs, December 1999, The Intuition Behind the Black-Litterman Model Portfolios.


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