Topics in Quantitative Finance, FIN 500R, Section 1

Philip H. Dybvig
Washington University in Saint Louis

syllabus

Welcome to Topics in Quantitative Finance! This course talks about ideas and situations that challenge our traditional understanding of quantitative finance.

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 Verification

some underlying theory:

(Sept 5) 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 7) Dybvig, Philip H. "Perpetual American Put: valuation and verification theorem," lecture notes, link

experimental 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.

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.

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 American Option Pricing

(Sept 12) Carr, Peter, 1998, Randomization and the American Put, Review of Financial Studies 11, 597-626. Stable URL: http://www.jstor.org/stable/2646011. slides by Nabi Arjmandi

Topic 3 Side-stepping the Investment Banks

(Sept 14) 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 Xunewi Liu

Topic 4 Textual Analysis Tools

(Sept 14) Azar, P. D., & Lo, A. W. (2016). The wisdom of twitter crowds: Predicting stock market reactions to FOMC meetings via twitter feeds. The Journal of Portfolio Management, 42(5), 123-134.link. slides by John Dooley

Topic 5 Understanding the financial crisis.

overviews and history:

(Sept 26) Reinhart, Carmen, and Kenneth Rogoff, 2009, This Time is Different: Eight Centuries of Financial Folly, Princeton: Princeton University Press. This book is not available online, but a lot of related data and figures are available at WashU link.

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:

Gorton, Gary, and Andrew Metrick, Securitized Banking and the Run on Repo, 2012, Journal of Financial Economics 104, 425-51. WashU link.

bonds and the crisis:

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.

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.pdf

connections: 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.

(Sept 19) 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"

Discussion of my comments at the G7 meetings in Bari, Italy, in May, 2017.

Topic 6 Credit risk

theory:

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:

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.

(Sept 28) 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 7 Indian Economy

(Oct 10) Ragan, Raghuram, "India in the global economy," First Ramnath Goenka Memorial Lecture. http://www.bis.org/review/r160316b.pdf.

Topic 8 Chinese markets and FX

(Sept 21) 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.

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

(Oct 3) Jin, Keyu, "Industrial Structure and Capital Flows," 2012, American Economic Review 102, 2111-2146. Stable URL: http://www.jstor.org/stable/41724616

Topic 9 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

empirical evidence:

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.

performance measurement:

(Oct 3) 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.

(Sept 28) 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.

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 10 Anti-corruption Campaign

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.

(Oct 5) Xu, Yongxin, 2017, Anticorruption Regulation and Firm Value: Evidence fdrom a Shock of Mandated Resignation of Directors in China, WashU link.

Topic 11 Finance in Africa

(Sept 26) Blavy, Rodolphe, Anupam Basu, and Murat A Yulek, 2004, Microfinance in Africa : Experience and Lessons From Selected African Countries, IMF Working paper, https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Microfinance-in-Africa-Experience-and-Lessons-From-Selected-African-Countries-17710.

Hearn, Bruce, and Jenifer Piesse, 2015, The Impact of Firm Size and Liquidity on the Cost of External Finance in Africa, South African Journal of Economics 83, 1-22. WashU link.

Gokcekus, Omer and Yui Suzuki, 2016, Mixing Washington Consensus with Beijing Consensus and Corruption in Africa, Singapore Economic Review 61. WashU link.

Topic 12 Workouts and pre-packaged bankruptcies

Kyle, Albert S. "Pete", 2017, "How to Implement Contingent Capital," in Edward L. Glaeser, Tano Santos, and E. Glen Weyl, eds., After the Flood: How the Great Recession Changed Economic Thought, University of Chicago Press. WashU link.

John, Kose, 1993, "Managing Financial Distress and Valuing Distressed Securities: A Survey and a Research Agenda," Financial Management 22, 60-78. WashU link.

Davydenko, Sergei A., Ilya A. Strebulaev and Xiaofei Zhao, 2012, "A Market-Based Study of the Cost of Default," Review of Financial Studies 2012, 2959-2999. WashU link.

Topic 13 Picking Stocks and accounting numbers

(Oct 5) Sloan, Richard G., 1998, "Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?" Accounting Review 71, 289-315. http://www.jstor.org/stable/248290.

Allen, Eric J., Chad R. Larson, and Richard G. Sloan, 2013, "Accrual reversals, earnings, and stock returns, Journal of Accounting and Economics 56, 113-129. WashU link.

Ghosh, Aloke, Zhaoyang Gu, and Prem C. Jain, 2005, "Sustained Earnings and Revenue Growth, Earnings Quality, and Earnings Response Coefficients," Review of Accounting Studies 10, 33-57. WashU link.

Nissim, Doron, and Stephen H. Penman, 2001, "Ratio Analysis and Equity Valuation: From Research to Practice," Review of Accounting Studies 6, 109-54. WashU link

Topic XX Investing with Transaction Costs

simple single-period model -- good for the intuition

Dybvig, Philip H., 2005, "Mean-Variance Portfolio Rebalancing with Transaction Costs," working paper. pdf file.

continuous-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/4622337

math background for the continuous-time models:

Harrison, J. Michael, 2013, "Brownian Models of Performance and Control," Cambridge University Press. Wash U link.

Topic XX Negative interest rates

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.

(Sept 21) Goodfriend, Marvin, 2016, "The Case for Unencumbering Interest Rates at the Zero Bound," mimeo, CMU, link

Topic XX High frequency trading

O'Hara, Maureen, "High Frequency Market Microstructure, Journal of Financial Economics 116, Issue 2, May 2015, Pages 257-270 WashU link.

Bjorn Hagstromer and Lars Norden, "The Diversity of High-frequency Traders," Journal of Financial Markets 16, 741--770 WashU link

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 XX Employee Stock Options

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

Topic XX Risk management

general ideas:

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.

failures:

Ross, Stephen A., 2002, "Forensic Finance: ENRON and Others," Fourth Angelo Costa Lecture, http://www.rivistapoliticaeconomica.it/nov_dic02/rossengl.pdf

Jorion, Philippe, 2000, "Risk Management Lessons from Long-Term Capital Management," European Financial Management 6, 277-300. WashU link.

Pirrong, Stephen Craig, 1997, "Metallgesellschaft: A Prudent Hedger Ruined, or a Wildcatter on NYMEX?" Journal of Futures Markets 17(5) 543-78. WashU link

hedging (asset-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 XX Law and finance

Roe, Mark J., 2011, The Derivatives Market's Payment Priorities as Financial Crisis Accelerator, Stanford Law Review 63, 539-590. WashU link.