Reading existing finance literature is important for two reasons:
One, exposure to varied ideas helps you discover what interests you. Nobody does their dissertation on “finance;” they do dissertations on “liquidity in off-the-run treasury bond auctions,” or “mortgage-backed securities trading spreads and implied default risk.” You don’t need to choose a dissertation area before applying, and your interests will evolve during the Ph.D. anyway. The professors who are considering admitting you to their program want to know that you’ve at least thought intelligently about what you want to research.
Two, the hardest thing for students to do is to make the transition from learners to contributors. Ph.D. students enter as classroom pupils; they are expected to leave as critical and original thinkers. Scientific breakthroughs very rarely come ex nihilos–out of nowhere–but rather as incremental but important progress. To become a contributor (and to pass your Ph.D. classes) you will be required to understand the important ideas that have contributed to the field of financial economics over the past 40 years, and also to be aware of what current discoveries are being made. This means doing a lot of reading.
There are two kinds of papers that are most useful to read:
Classic papers are the seminal ideas that constitute the foundations of finance research. These are the “shoulders of giants” on which you’ll stand.
Working papers are the cutting edge ideas on the frontier of the science. By the time a paper is actually published, its ideas have already been discussed for perhaps 1-3 years.
One of my primary motivations for starting this blog was to have somewhere to outline and discuss the papers I read.
I’ve read maybe a couple dozen working papers, and I’ll read more over the summer. Many working papers are available with a free SSRN account. Look for papers submitted by good researchers at respected universities.
One of my professors kept the lists of “classic papers” he was expected to read during his Ph.D. program. I have those lists of over 200 papers, and I hope to get through 30-40 of them this summer. These papers usually appeared in top journals (esp. Journal of Finance and Journal of Financial Economics), won major awards, and/or have the most citations on Google Scholar.
Next post: Ph.D. Prep – Selecting Programs