Topics in Quantitative Finance, FIN 500R, Section 2

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 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): 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 Verification

some underlying theory:

(Sept 5) Shell, Karl, 1971, "Notes on the Economics of Infinity," 1971, Journal of Political Economy 79. Stable URL:

Dybvig, Philip H., and Chi-fu Huang, 1988, "Nonnegative wealth, Absence of Arbitrage, and Feasible Consumption Plans," Review of Financial Studies 1. Stable URL: (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:

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:

(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:

Moinas, Sophie, and Sebastien Pouget, "The Bubble Game: An Experimental Study of Speculation," Econometrica 81,

(Oct 5) Mitchell, Mark, Todd Pulvino, and Erik Stafford, 2002, "Limited Arbitrage in Equity Markets," Journal of finance LVII. Stable URL: slides by Ricky Guo.

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:

Topic 2 Employee Stock Options

(Sept 12) 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: slides by Olivia Zhou.

(Sept 28) Cvitanic, Jaksa, Zvi Wiener, and Fernando Zapatero, 2008, Analytic Pricing of Employee Stock Options, Review of Financial Studies 21, 683-724. WashU link slides slides+notes by Chongyu Li.

Topic 3 Anti-corruption Campaign

(Sept 19) Lin, Chen, Randall Morck, Bernard Yeung, and Xiaofeng Zhao, 2016, Anti-Corruption Reforms and Shareholder Valuations: Event Study Evidence from China, 2016 slides by Cynthia (Yuying) Wang.

Xu, Yongxin, 2016, Does Anticorruption Regulation Enhance or Impede Firm Value? Evidence from a Quasi-Natural Experiment in China, WashU link.

Topic 4 Risk management

general ideas:

(Sept 21) 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. slides by Meiting Liu.


(Sept 21) Ross, Stephen A., 2002, "Forensic Finance: ENRON and Others," Fourth Angelo Costa Lecture, slides by Rujing Rita Jia.

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:

stress testing:

(Sept 14) Hirtle, Beverly, Anna Kovner, James Vickery, and Meru Bhanot, 2015, "Assessing Financial Stability: The Capital and Loss Assessment under Stress Scenarios (CLASS) Model, mimeo, slides by Sahil Ghurye.

Topic 5 Negative interest rates

(Sept 19) Goodfriend, Marvin, 2000, Overcoming the Zero Bound on Interest Rate Policy, Journal of Money, Credit, and Banking 32, 1007-1035. slides by Yuanfang Liu.

Goodfriend, Marvin, 2016, "The Case for Unencumbering Interest Rates at the Zero Bound," mimeo, CMU,

Heider, Florian, Farzad Saidi, and Glenn Schepens, 2017, Life Below Zero: Bank Lending Under Negative Policy Rates, working paper.

Topic 6 Mutual Fund Performance

theory of performance of active managers:

(Sept 12) 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: presentation by Yuming Lou.

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:

performance measurement:

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:

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:

a cool old related paper (from before computers!):

(Sept 26) Cowles, Alfred 3rd, 1933, "Can Stock Market Forecasters Forecast?" Econometrica 1, 309-324. Stable URL: slides by Lucy Chen.

Topic 7 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:

(Oct 3) Jang, Bong-gyu, Hyeng Keun Koo, Hong Liu, and Mark Loewenstein, 2007, "Liquidity Premia and Transaction Costs," 2329-2366. Stable URL: slides by Sijia Lily Lou.

math background for the continuous-time models:

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

Topic 8 Understanding the financial crisis.


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.

Prescott, Edward Simpson, 2010, "Introduction to the Special Issue on the Diamond-Dybvig Model," Federal Bank of Richmond Economic Quarterly, First Quarter 2010. Link:

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:

(Oct 3) Krishnamurthy, Arvind, and Annette Vissing-Jorgensen, 2013, "The impact of Treasury supply on financial sector lending and stability," forthcoming Journal of Financial Economics, slides by Christine Ma.

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, 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:

Atlanta Fed interview on liquidity: 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: 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 9 Side-stepping the Investment Banks

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.

(Oct 5) Mukherjee, Tarun K., H. Kent Baker, Vineeta L. Hingorani, 2002, "Why Firms Adopt and Discontinue New-Issue Dividend Reinvestment Plans," Journal of Economics and Finance 26, 284-96. WashU link. slides by Yang Zhang.

Topic 10 Endowment Management

(Sept 26) Dybvig, Philip H., and Zhenjiang Qin, 2017, How to Squander Your Endowment: Pitfalls and Remedies, mimeo, Washington University in Saint Louis. WashU link slides by Leon Zhao.

Topic 11 Venture Capital

(Oct 10) Hochberg, Yael V., Alexander Ljungqvist, and Yang Lu, Networking as a Barrier to Entry and the Competitive Supply of Venture Capital, 2010, Journal of Finance 65, 829-859. WashU link. slides by Spike Zhong.

Masulis, Ronald W., and Rajarishi Nahala, Venture Capital Conflicts of Interest: Evidence from Acquisitions of Venture-Backed Firms, 2011, Journal of Financial and Quantitative Analysis 46, 395-430. WashU link.

Topic 12 Predicting Stock Returns

(Oct 12) Huang, Dashan, Huacheng Zhang, and Guofu Zhou, "Twin Momentum," working paper. slides by Hejiang Xie.

Huang, Dashan, Fuwei Jiang, Jun Tu, and Guofu Zhou, "Investor Sentiment Aligned: a Powerful Predictor of Stock Returns," working paper.

Tu, Jun, "Is Regime Switching in Stock Returns Important in Portfolio Decisions?" working paper.

Topic 13 Bitcoin and other crypto-currencies

(Oct 10) Weber, Beat, Bitcoin and the legitimacy crisis of money, 2014, Cambridge Journal of Economics 40, 17-41. WashU link slides by Nishant Vaishampayan.

Topic 14 Textual Analysis and Big Data

Azar, P. D., and 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. slides by John Dooley (from Section 1 of this course)

(Oct 10: chapters 1-3) Aggarwal, Charu C. and ChengXiang Zhai, 2012, Mining Text Data, Springer. WashU link slides by Mick Gu.

Aggarwal, Charu C., 2015, Data Mining: The Textbook, Springer. WashU link

Topic 15 Chinese markets and FX

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.

(Sept 28) Song, Zheng, Kjetil Storesletten, and Fabrizio Zilibotti, 2011, "Growing Like China," American Economic Review 101, 196-233. Stable URL: slides by Xiaoyu Sisley Zhu.

Jin, Keyu, "Industrial Structure and Capital Flows," 2012, American Economic Review 102, 2111-2146. Stable URL:

Allen, Franklin, Meijun Qian, and Jing Xie, 2017, Understanding Informal Financing, working paper.


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:

Li, Wei, 2014, "High Frequency Trading with Speed Hierarchies," 2014, mimeo link

Topic XX Credit risk


Duffie, Darrell, and Singleton, Kenneth L., 1999, "Modeling Term Structures of Defaultable Bonds," Journal of Financial Studies 12, 687-720. Stable URL:


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:

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:

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.