Teaching - Vitae - About Me - Contact - Olin School - Wash U
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Picture of me receiving the 2022 Sveriges Riksbank Prize in Economic Sciences in honor of Alfred Nobel from H.M. King Carl XVI Gustaf of Sweden at Konserthuset Stockholm on 10 December 2022. Professor Tore Ellingsen, Chairman of the Economics Prize Committee, looks on. Photo: Nanaka Adachi © Nobel Prize Outreach. |
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.
Accounting Magic I was pleased to give a keynote speech at the inaugural annual meeting of the Accounting and Economics Society (AES) held at NYU on August 8-9, 2024. The mission of the AES is "to promote the development of theory and its use in empirical discourse." My talk, entitled Accounting Magic and Witchcraft, talked about some great things about accounting (the magic) and also some problems (the witchcraft). In particular, accounting has trouble with issues like detecting fraud, hedge accounting, and loan writedowns, because accountants need information not contained in ledgers. Accountants should either get the information and tools they need to evaluate these things, or they should delegate them to different experts, like bank examiners or actuaries in a different context. video slides conference website
Gambling! Gambling by firms at small scale ("gambling for redemption") tends to be socially useful since it preserves continuation value more often, but gambling by firms at large scale ("gambling for ripoff") benefits equity but harms bondholders more and destroys continuation value most of the time. This is one of the main conclusions of a paper with Cyndi Xinyu Hou. The paper also finds that exemption of Qualified Financial Contracts (QFCs) from bankruptcy law allows firms to gamble more than they could absent the exemption, and makes it harder for firms to borrow.
Nobel Lecture Multiple Equilibria I was pleased to be named 2022 Economic Sciences Laureate alongside Ben Bernanke and Doug Diamond, "for research on banks and financial crises." One of my duties as a new Laureate was to present a Nobel Lecture. My Nobel Lecture was for general audiences, and a written version can be found here. There is also a technical written version published in the Journal of Political Economy, which can be found here. Both versions focus on my paper with Doug cited in the Prize Announcement and some co-authors and mentors who were important influences on my at the time the Prize paper was written. The Lecture is dedicated to my advisor, Steve Ross, who died much too young in 2017. My lecture features joint papers with Chester Spatt and Gerry Jaynes. The Prize paper and the prior papers with my co-authors share the theme that having multiple equilibrium is not a defect, but is rather the interesting feature of the model. The Nobel foundation has also published a Biographical, a sort of academic autobiography that speculates about how early interests influenced my later development as a scholar.
Bank Runs! Doug Diamond and I organized a
conference
celebrating the 36th anniversary of our paper, "Bank Runs,
Deposit Insurance, and Liquidity." The conference, which was proposed
and funded by former 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
reprint
of the original Diamond-Dybvig paper appeared in the Winter 2000 issue of the Minneapolis
Fed's Quarterly Review
. This issue and the
First
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