|Picture of me with the other speakers at the G7 Finance Ministers and Central Bank Governors' meeting in Bari, Italy, in May, 2017. I am second from the right.|
Welcome! This is the home page for Philip H. Dybvig, Boatmen's Bancshares Professor of Banking and Finance at the Olin School of Business at Washington University in Saint Louis, and Director of the Institute of Financial Studies at the Southwestern University of Finance and Economics, in Chengdu, Sichuan, China.
Bank Runs! Doug Diamond and I organized a
celebrating the 36th anniversary of our paper, "Bank Runs,
Deposit Insurance, and Liquidity." The conference, which was proposed
and funded by Wash U Olin Dean Mark Taylor, featured many distinguished
speakers, including Sir Paul Tucker, Nobuhiro Kiyotaki, Karl Shell, and
Neil Wallace. They highlighted the influence of the model on policy,
practice, and many areas of economic research. A
of the original Diamond-Dybvig paper appeared in the Winter 2000 issue of the Minneapolis
Quarterly Review. This issue and the
Quarter 2010 issue of the Economic Quarterly of the Richmond Fed
were both devoted to the Diamond-Dybvig model.
Steve Ross and Contracting Steve Ross is best known for his work in asset pricing, but he also made important contributions to information economics. "What Steve Ross Taught me about Contracting," written for a special issue of the Journal of Portfolio Management, discusses in simple terms three of Steve's papers contributing to agency theory. Ross (1973) was the first paper on agency in finance or economics. It introduced the terminology for agency problems in economics and was the first to look at the problem from the principal's perspective and also introduced the first-order approach still used today. The other papers discuss (1) performance measurement and (2) the surprising impact on risk-taking incentives of having convex compensation.
University Endowments University endowments are thought to have a commitment to their donors to preserve capital so their contributions can have a permanent impact (in contrast with annual giving and other shorter-term contributions). However, the criterion typically used by practitioners for evaluating preservation of capital is fundamentally flawed, as shown in "How to Squander Your Endowment: Pitfalls and Remedies," with Zhenjiang Qin. The paper shows a simple fix to the rule and also shows how to fix a similar problem with common rules for smoothing spending.
Decision-making in Hierarchies Fighting corruption at low levels in a hierarchy probably only makes things worse, according to "Tigers and Flies: Corruption, Discretion, and Expertise in a Hierarchy" (online appendix) which reports joint work with Yishu Fu. Rigid constraints and fighting corruption are substitutes, since fighting corruption aligns incentives and makes it optimal to give managers more discretion. Furthermore, training and fighting corruption are complements: if corruption is high, there is no point in training low-level managers if you don't trust them enough to give them discretion.
Predictability The widely-cited paper Campbell and Shiller (1988) shows that the dividend-price ratio should predict either future stock returns or future dividend growth or both, based on accounting identities and an assumption that the log dividend-price ratio (LDPR) does not blow up over time. Unfortunately, the test they present of whether the LDPR blows up does not test that at all, and a correct test cannot reject the hypothesis that it blows up. This result and its implications for applying the Campbell-Shiller results to predictability can be found in "That is not my dog: why doesn't the log dividend-price ratio seem to predict future log returns or log dividend growth?" with Huacheng Zhang. We find that we do not have enough data to use the Campbell-Shiller analysis to detect any predictability of returns by the LDPR, and if the LDPR does indeed blow up we may never have enough data.
Transaction Cost Smart Investing How should we adjust our rebalancing strategy in the face of trading costs? A simple and flexible framework for answering this question is given by "Mean-Variance Portfolio Rebalancing with Transaction Costs," which reports joint work with Luca Pezzo. Using a simple single-period framework gives us analytic results and insights. For example, we show that the traditional symmetric futures overlay strategy is not a good choice when we are faced with costs. Rather, we should short futures when overexposed to equities but go long shares when underexposed.
Risk Management Pierre Liang has joined Bill Marshall and me in writing an updated version of our 1997 article talking about the good, the bad, and the ugly of the "New" risk management using financial derivatives to hedge many risks in firms. The "New" risk management is now commonplace and played an important role in the financial crisis, so the article is more timely than when it was first written. The new article contains the same examples and critical analysis as the original article but includes an updated description of the accounting rules and suggestions for designing a risk management policy.
Arbitrage Steve Ross of MIT and I have written the working paper Arbitrage, State Prices and Portfolio Theory, which gives an introduction to advanced concepts in investments at a level that is appropriate for advanced undergraduates or beginning doctoral students in finance. The focus is on the economics; the presentation uses single-period models that are less challenging quantitatively than continuous-time models. The paper is to appear as a chapter in the Handbook of the Economics of Finance being edited by George Constantinides and René Stulz.
Some scanned and processed images courtesy of Megan Zahniser