Philip H. Dybvig
Washington University in Saint Louis
Welcome to Topics in Quantitative Finance! This course talks about ideas and situations that challenge our traditional understanding of quantitative finance.
Final Exam The final exam will be based on all the classes (including the ones I taught). While the papers have a fair amount of mathematics, the exam will not have any. The questions should be answered using simple English to explain the economics. There is more information on the cover of the sample exam, which is the exam from another year's class. Note that the set of papers covered in the other year was different, and therefore some of the questions and answers may be unfamiliar to you.
Here is the sample exam and an answer sheet (although due to the nature of the
exam there are many correct answers):
...final exam pdf size 37K
...suggested answers pdf size 51K
Papers Each week we will discuss, in my lectures or in the student presentations, interesting papers. I will be posting the papers on this web site. Many of the papers can be accessed on JSTOR ("Journal STORage"), an online repository for academic articles. The "Stable URLs" are links on JSTOR. To download the papers for free, you need to use this from a university IP address (or proxy server or VPN), or you can access the papers from other universities. Other links use the university's library proxy server so if you access them from off-campus you will need to use your WUSTL KEY.
The papers with dates were presented in class and you should have some basic knowledge of those papers in the exam. Other papers are supplemental. Knowledge of those papers will be useful but not essential for the exam.
Topic 1 Bubbles, Doubling Strategies, Suicidal Strategies, and Verificationsome underlying theory:
(Sept 6) Shell, Karl, 1971, "Notes on the Economics of Infinity," 1971, Journal of Political Economy 79. Stable URL: http://www.jstor.org/stable/1830269.
Dybvig, Philip H., and Chi-fu Huang, 1988, "Nonnegative wealth, Absence of Arbitrage, and Feasible Consumption Plans," Review of Financial Studies 1. Stable URL: http://www.jstor.org/stable/2962096. (Note: skip the appendix. There are many errors in the typesetting.)
Heston, Steven, Mark Loewenstein, and Gregory A. Willard, 2007, "Options and Bubbles," Review of Financial Studies 20. Stable URL: http://www.jstor.org/stable/4494773.
Samuelson, Paul A., 1958, "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy 66. Stable URL: http://www.jstor.org/stable/1826989.
(Sept 8) Dybvig, Philip H. "Perpetual American Put: valuation and verification theorem," lecture notes, linkexperimental and empirical evidence:
Smith, Vernon, Gerry Suchanek, and Arlington Williams, 1988, "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica 56, 1119-1151. Stable URL: http://www.jstor.org/stable/1911361.
Moinas, Sophie, and Sebastien Pouget, "The Bubble Game: An Experimental Study of Speculation," Econometrica 81, http://www.jstor.org/stable/23524184.
(Sept 13) Mitchell, Mark, Todd Pulvino, and Erik Stafford, 2002, "Limited Arbitrage in Equity Markets," Journal of finance LVII. Stable URL: http://www.jstor.org/stable/2697750. Slides by Richa Deogaonkar.
Lamont, Owen, and Richard Thaler, 2003, "Can the Market Add and Subtract? Mispricing in the Tech Stock Carve-outs," Journal of Political Economy 111. Stable URL: http://www.jstor.org/stable/10.1086/367683.
Topic 2 Investing with Transaction Costssimple single-period model -- good for the intuition
(Sept 22) Dybvig, Philip H., 2005, "Mean-Variance Portfolio Rebalancing with Transaction Costs," working paper. pdf file. Slides by Sining Liucontinuous-time models:
Liu, Hong, and Mark Loewenstein, 2002, "Optimal Portfolio Selection with Transaction Costs and Finite Horizons," Review of Financial Studies 15, 805-835.Stable URL: http://www.jstor.org/stable/2696722.
Jang, Bong-gyu, Hyeng Keun Koo, Hong Liu, and Mark Loewenstein, 2007, "Liquidity Premia and Transaction Costs," 2329-2366. Stable URL: http://www.jstor.org/stable/4622337math background for the continuous-time models:
Harrison, J. Michael, 2013, "Brownian Models of Performance and Control," Cambridge University Press. Wash U link.
Topic 3 Understanding the financial crisis.overviews:
Gorton, Gary, and Andrew Metrick, 2012, "Getting Up to Speed on the Financial Crisis: A One-Weekend-Reader's Guide," Journal of Economic Literature 50, 128-150. Link: WashU link. Slides by Sneha Murali.
Prescott, Edward Simpson, 2010, "Introduction to the Special Issue on the Diamond-Dybvig Model," Federal Bank of Richmond Economic Quarterly, First Quarter 2010. Link: http://www.richmondfed.org/publications/research/economic_quarterly/2010/q1/pdf/prescott.pdf.the run on the repo market:
(Oct 12) Gorton, Gary, and Andrew Metrick, Securitized Banking and the Run on Repo, 2012, Journal of Financial Economics 104, 425-51. WashU link. Slides by Jing'ai Chenbonds and the crisis:
(Sept 13) He, Zhiguo, and Wei Xiong, 2012, "Rollover Risk and Credit Risk," Journal of Finance 67, 391--429. Stable URL: http://www.jstor.org/stable/41419701. Slides by Sophia Yuxiu Ma
Krishnamurthy, Arvind, and Annette Vissing-Jorgensen, 2013, "The impact of Treasury supply on financial sector lending and stability," forthcoming Journal of Financial Economics, http://faculty.haas.berkeley.edu/vissing/Shortdebt2015aug24all.pdfconnections: my work and the crisis
Diamond, Douglas W., and Philip H. Dybvig, 1983, Bank Runs, Deposit Insurance, and Liquidity, Journal of Political Economy, reprinted in the Minneapolis Fed review, http://www.mpls.frb.org/research/qr/qr2412.pdf some slides more slides.
Diamond, Douglas W., and Philip H. Dybvig, 1986, Banking Theory, Deposit Insurance, and Bank Regulation, Journal of Business 59, 55-68. Stable URL: http://www.jstor.org/stable/2352687.
Atlanta Fed interview on liquidity: http://www.frbatlanta.org/news/multimedia/12fmc_dybvig_interview.cfm?printable. This interview is pretty basic (and does not cover shadow banking), but does cover a lot of what regulators should be thinking about. Here are some slides from a related session in the conference: http://www.frbatlanta.org/documents/news/conferences/12fmc/12fmc_dybvig_pres.pdf. Unfortunately, the slides give more questions than answers!
Talk "International Origins of the Financial Crisis"
Talk "Bank Safety and Liquidity Provision"
Topic 4 Negative interest rates
(Sept 15) Goodfriend, Marvin, 2000, Overcoming the Zero Bound on Interest Rate Policy, Journal of Money, Credit, and Banking 32, 1007-1035. http://www.jstor.org/stable/2601157. Slides by Xianzhe Zhou
(Sept 15) Goodfriend, Marvin, 2016, "The Case for Unencumbering Interest Rates at the Zero Bound," mimeo, CMU,
Topic 5 Mutual Fund Performance
theory of performance of active managers:Berk, Jonathan B., and Richard C. Green. 2004. "Mutual Fund Flows and Performance in Rational Markets." Journal of Political Economy 112, No. 6, 1269-95. Stable URL: http://www.jstor.org/stable/10.1086/424739
(Sept 15) Pastor, Lubos, and Robert Stambaugh, 2012, "On the Size of the Active Management Industry," Journal of Political Economy 120, No. 4 (August 2012), pp. 740-781. Stable URL: http://www.jstor.org/stable/10.1086/667987. Slides by Yan Xu
(Sept 29) Pastor, Lubos, Robert Stambaugh, and Lucian Taylor, 2014, "Scale and Skill in Active Management," mimeo, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2318788 Slides by Xijie Cheng.
(Oct 12) Dybvig, Philip H., and Stephen A. Ross, 1985, "Differential Information and Performance Measurement Using a Security Market Line," Journal of Finance 40, 383-399 Stable URL: http://www.jstor.org/stable/2327891 Slides by Xin Fang
(Oct 6) Hunter, David L. and Kandel , Eugene and Kandel (deceased), Shmuel and Wermers, Russ, Mutual Fund Performance Evaluation with Active Peer Benchmarks (August 11, 2013). Journal of Financial Economics (JFE), forthcoming. Pre-publication version: http://ssrn.com/abstract=1344140. Slides by Ranzi Zheng
a cool old related paper (from before computers!):
Cowles, Alfred 3rd, 1933, "Can Stock Market Forecasters Forecast?" Econometrica 1, 309-324. Stable URL: http://www.jstor.org/stable/1907042.
Topic 6 High frequency trading
(Sept 20) O'Hara, Maureen, "High Frequency Market Microstructure, Journal of Financial Economics 116, Issue 2, May 2015, Pages 257-270 WashU link. Slides by Anand Ramachandran.
(Oct 11) Bjorn Hagstromer and Lars Norden, "The Diversity of High-frequency Traders," Journal of Financial Markets 16, 741--770 WashU link Slides by Alex Zheng
Biais, Bruno, Thierry Foucault, Sophie Moinas, "Equilibrium Fast Trading," Journal of Financial Economics 116 (2015) 292-313 WashU link
Pagnotta, Emiliano, and Thomas Philippon, 2015, "Competing on Speed," mimeo Link: http://pages.stern.nyu.edu/~tphilipp/papers/Speed.pdf
Li, Wei, 2014, "High Frequency Trading with Speed Hierarchies," 2014, mimeo link
Topic 8 Side-stepping the Investment Banks
(Sept 22) Scholes, Myron and Mark Wolfson, "Decentralized Investment Banking: the Case of Discount Dividend-Reinvestment and Discount Dividend-Reinvestment and Stock-Purchase Plans," Journal of Financial Economics 23, 7-35. WashU link. Slides by Ruoshi Qi.
Topic 9 Chinese markets and FX
(Sept 20) Kehoe, Timothy J., and Kim J. Ruhl, 2010, "Why Have Economic Reforms in Mexico Not Generated Growth?" Journal of Economic Literature 48, No. 4, pp. 1005-1027 WashU link. Slides by Shulin Miao.
Song, Zheng, Kjetil Storesletten, and Fabrizio Zilibotti, 2011, "Growing Like China," American Economic Review 101, 196-233. Stable URL: http://www.jstor.org/stable/41038787
Jin, Keyu, "Industrial Structure and Capital Flows," 2012, American Economic Review 102, 2111-2146. Stable URL: http://www.jstor.org/stable/41724616
Topic 10 Employee Stock Options
(Oct 13) Dybvig, Philip H. and Mark Loewenstein, 2003, "Employee Reload Options: Pricing, Hedging, and Optimal Exercise," Review of Financial Studies 16, 2003, 145-171. Stable URL: http://www.jstor.org/stable/1262728 Slides by Kevin Joseph Carroll
Topic 11 Credit risktheory:
Duffie, Darrell, and Singleton, Kenneth L., 1999, "Modeling Term Structures of Defaultable Bonds," Journal of Financial Studies 12, 687-720. Stable URL: http://www.jstor.org/stable/2645962.empirics:
(Sept 27) Pan, Jun, and Kenneth J. Singleton, 2008, "Default and Recovery in the Term Structure of Sovereign CDS Spreads," Journal of Finance 63, 2345-2384. Stable URL: http://www.jstor.org/stable/25094509. Slides by PK Hariharan.
Collin-Dufresne, Pierre, Robert S. Goldstein, and Fan Yang, 2012, "On the Relative Pricing of long Maturity Index Options and Collateralized Debt Obligations," Journal of Finance 67, 1983-2014. Stable URL: http://www.jstor.org/stable/23324366
Topic 13 Dynamic Portfolio Allocation
(Oct 4) Sorensen, Eric H., Hua, Ronald, Qian, Edward, 2005, Contextual Fundamentals, Models, and Active Management: Improving on One-Size-Fits-All, Journal of Portfolio Management 32, 23-36. WashU link Slides by Tianchang Wang
(Sept 29) Novy-Marx, Robert, 2013, The other side of value: The gross profitability premium, Journal of Financial Economics 108, 1-28. WashU link. Slides by Demi (Menglan) Xu.
Topic 14 Market Reaction to Anti-corruption
(Oct 11) Lin, Chen, Randall Morck, Bernard Yeung, and Xiaofeng Zhao, 2016, Anti-Corruption Reforms and Shareholder Valuations: Event Study Evidence from China, 2016 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2729087 Slides by David Wang
Xu, Yongxin, 2016, Does Anticorruption Regulation Enhance or Impede Firm Value? Evidence from a Quasi-Natural Experiment in China, WashU link
Topic 15 Risk managementgeneral ideas:
(Oct 13) Philip H. Dybvig, Pierre Jinghong Liang, and William J. Marshall, 2013, "The New Risk Management: The Good, the Bad, and the Ugly," Federal Reserve Bank of Saint Louis Review, July/August 2013, 95(4) 273--91. http://research.stlouisfed.org/publications/review/article/9914 Slides by Yaqi Zhangfailures:
Ross, Stephen A., 2002, "Forensic Finance: ENRON and Others," Fourth Angelo Costa Lecture, http://www.rivistapoliticaeconomica.it/nov_dic02/rossengl.pdf
(Oct 12) Jorion, Philippe, 2000, "Risk Management Lessons from Long-Term Capital Management," European Financial Management 6, 277-300. WashU link Slides by Shan Sun
Pirrong, Stephen Craig, 1997, "Metallgesellschaft: A Prudent Hedger Ruined, or a Wildcatter on NYMEX?" Journal of Futures Markets 17(5) 543-78. WashU linkasset-liability management of a pension liability:
Brown, David T., Philip H. Dybvig and William J. Marshall, 2001, The Cost and Duration of Cash-Balance Pension Plans, Financial Analysts Journal 57, No. 6 (Nov. - Dec., 2001), pp. 50-62 Stable URL: http://www.jstor.org/stable/4480356.
Topic 16 Law and finance
(Oct 11) Roe, Mark J., 2011, The Derivatives Market's Payment Priorities as Financial Crisis Accelerator, Stanford Law Review 63, 539-590. WashU link Slides by Yi Yin
Topic 17 Project finance
(Oct 12) Esty, Benjamin C., 2003, The Economic Motivations for Using Project Finance, HBS mimeo. http://www.people.hbs.edu/besty/BCE%20PF%20Motivations%202-14-03.pdf Slides by Kevin Shen
Topic 18 Conditional asset pricing
(Oct 13) Maurer, Thomas, and Bo Tang, "Pricing implications of conditional market beta," Slides by Bo Tang