FIN 254f(2): Financial Manias and Crises: Ph.D topics

Spring 2010: Very preliminary

FIN 254f(2) Financial Manias and Crises : Ph.D. Readings

Instructor

Times:

Course Description

This syllabus provides additional Ph.D. readings for FIN254. It's general objective is to concentrate on theoretical models for financial market bubbles, and related models on crises. This list is rather long right now, even though my eventual goal is to concentrate in class on a small subset of papers. Students can then look at some of the background readings on their own.

Prerequisites

This section of this course is for Ph.D. students only as it requires as background the first year micro/macro Ph.D. sequence as well as FIN305f. It is required for the Ph.D. finance field exam.

Books : In addition to main syllabus

  1. Allen and Gale, Understanding Financial Crises, Oxford, 2007.
  2. Brunnermeier, Asset Pricing Under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding, Oxford, 2001.

Readings: in addition to the main syllabus

  1. Background
    1. Rational expectations theory
      1. Tirole, On the possibility of speculation under rational expectations, Econometrica, 1982, 50: 1163-1182
      2. Blanchard and Watson, Bubbles, rational expectations and financial markets, in Crisis in the Economic and Financial Structure, edited by P. Wachtel, 1982, 295-315.
      3. Allen and Gale, chapter 1.
    2. Classic testing
      1. Shiller, Do stock prices move too much to be justified by subsequent changes in dividends?, American Economic Review, 1981, 71(3):421-436.
      2. Campbell and Shiller, Cointegration and tests of present value models, Journal of Political Economy, 1987, 95: 1062-1087.
      3. Campbell and Shiller, Valuation ratios and the long-run stock market outlook: An update, Advances in Behavioral Finance, 2005,Princeton University Press, 173-201.
      4. West, A specification test for speculative bubbles, Quarterly Journal of Economics, 1987, 102:553-580.
      5. Leroy and Porter, The present value relation: Tests based on variance bounds, Econometrica, 1981, 64: 555-574.
      6. Kliedon, Variance bounds tests and stock price valuation models, Journal of Political Economy, 1986, 94(5): 953-1001.
      7. Diba and Grossman, The theory of rational bubbles in stock prices, Economic Journal, 1988, 98(392): 746-754.
      8. Barsky and DeLong, Why does the stock market fluctuate?, Quarterly Journal of Economics, 1993, 108: 291-311.
  2. Limits to arbitrage and noise traders
    1. DeLong et al., Noise trader risk in financial markets, Journal of Political Economy, 1990 98: 703-738.
    2. Shleifer and Vishny, The limits of arbitrage, Journal of Finance, 1997, 52: 35-55.
  3. Coordination and bubbles
    1. Abreu and Brunnermeir, 2003, Bubbles and crashes, Econometrica, 71, 173-204.
    2. Brunnermeier and Nagel, Hedge funds and the technology bubble, Journal of Finance, 2004, 59(5): 2013-2040.
    3. Temin and Voth, Riding the South Sea Bubble, American Economic Review, 2004, 94(5).
  4. Leverage, collateral, and financial fragility
    1. Geanakoplos, The Leverage Cycle, NBER Macro Annual , 2009.
    2. Geanakoplos, Promises, promises, in The Economy as an Evolving Complex System II, edited by W. Brian Arthur, Steven Durlauf, and David Lane, Addison-Wesley, 1997.
    3. Allen and Gale, chapter 5.
    4. Metrick and Gorton, Haircuts, Yale working paper, 2009.
    5. Allen and Gale, 2005, From cash-in-the-market pricing to financial fragility, Journal of the European Economic Association, 3, 535-546.
    6. Bernanke and Gertler, Financial fragility and economic performance, Quarterly Journal of Economics, 1990, 105(1): 87-114.
    7. Kiyotaki and Moore, Credit cycles, Journal of Political Economy, 1997, 105(2): 211-48.
    8. Jermann and Quadrini, Macroeconomic effects of financial markets, NBER working paper, 2009.
  5. Heterogeneity
    1. Harrison and Kreps, Speculative investor behavior in a stock market with heterogeneous expectations, Quarterly Journal of Economics, 1978, 89: 323-336.
    2. Scheinkman and Xiong, Overconfidence and speculative bubbles, Journal of Political Economy, 111, 2003: 1183-1219.
    3. Hong and Scheinkman, Advisors, and asset prices: A model of the origins of bubbles, Journal of Financial Economics, 89, 2008: 268-287.
    4. Hong and Stein, 1999, A unified theory of underreaction, momentum trading and overreaction in asset markets, Journal of Finance, 54, 2143-2184.
    5. Khandani and Lo, What happened to the quants in August 2007, Journal of Portfolio Management.
  6. Bubbles in the laboratory
    1. Smith et. al., Suchanek and Williams, Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets, Econometrica, 56(5): 1119-51.
    2. Lei, Noussair, and Plott, Nonspeculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs actual irrationality, Econometrica, 2001, 69(4): 831-859.
    3. Hussam, Porter, and Smith, Thar She Blows: Can Bubbles be Rekindled with Experienced Subjects?, American Economic Review, 2008, 98:924-937.
    4. Haruvy, Lahav, and Noussair, Traders expectations in asset markets: Experimental evidence, American Economic Review , 2007, 97(5): 1901-1920.
  7. Investor beliefs from the field
    1. Shiller, Measuring bubble expectations and investor confidence, Journal of Psychology and Financial Markets, 2000, 1: 49-60.
    2. Dominitz and Manski, Measuring and interpreting expectations of equity returns, 2005.
    3. Goetzmann, Peng, and Yen, The subprime crisis and house price appreciation, 2009, NBER working paper.
  8. Crashes, strategy dynamics, and agent-based models
    1. Genotte and Leland, Market liquidity, hedging, and crashes, American Economic Review, 1990, 80(5): 999-1021.
    2. Grossman, An analysis of the implications for stock and futures price volatility of program trading and dynamic hedging strategies, Journal of Business, 1988, 61:275-298.
    3. Brock and Hommes, Heterogeneous beliefs and routes to chaos in a simple asset pricing model, Journal of Economic Dynamics and Control , 1998, 22: 1235-1274.
    4. Lux, Time variation of second moments from a noise trader/infection model, Journal of Economic Dynamics and Control, 1997, 22:1-38.
    5. Duffy, chapter in Handbook of Computational Economics.
    6. Hommes, chapter in Handbook of Computational Economics.
    7. LeBaron, chapter in Handbook of Computational Economics.
    8. Bulow and Klemperer, Rational frenzies and crashes, Journal of Political Economy, 1994, 102(1): 1-23.
    9. Zeeman, On the unstable behavior of stock exchanges, Journal of Mathematical Economics, 1974, 1: 39-49.
    10. Ussher, A speculative futures market with zero-intelligence, Eastern Economic Journal , 2008, 34: 518-549.
  9. Banking, intermediation, and liquidity
    1. Allen and Gale, chapter 3.
    2. Brunnermeier and Pedersen, 2008, Market liquidity and funding liquidity, Review of Financial studies (forthcoming).
    3. Afonso and Shin, Systemic risk and liquidity in payment systems, NBER working paper.
    4. Morris and Shin, Illiquidity component of credit risk, Princeton University 2009.
    5. Morris and Shin, Liquidity black holes, Review of Finance, 2004, 8: 1-18.
    6. Diamond and Dybvig, Bank runs, deposit insurance, and liquidity, Journal of Political Economy, 1983, 91: 401-419.
    7. Gorton, Banking panics and business cycles, Oxford Economic Papers, 1988, 40:751-781.
    8. Chari and Jagannathan, Banking panics, information, and rational expectations equilibrium, Journal of Finance 1988, 43(3):749-761.
  10. Agency problems and risk shifting
    1. Allen and Gale, chapter 9.
    2. Allen and Gale, 2000.
  11. Knightian uncertainty
    1. Krishnamurthy, Amplification mechanisms in liquidity crises, NBER wp 15040, 2009.
    2. Brock and Manski, Competitive Lending with partial knowledge of loan repayment, working paper.
    3. Note: Caballero and Simsek (below) also belongs here.
  12. Contagion/Networks
    1. Allen and Gale, 2007, chapter 10.
    2. Allen, Babus, and Carletti, Financial Connections and Systemic Risk, 2009.
    3. Caballero and Simsek, Fire Sales in a Model of Complexity, 2009.
    4. Iyer and Puri, Understanding bank runs: The importance of depositor-bank relationships and networks, NBER working paper, 2009.