Robert C. Merton

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This article is about the economist. For the sociologist, see Robert K. Merton.
Robert C. Merton
Image:889091473206 0 ALB.jpg
Robert C. Merton, 2006
BornJuly 31 1944 (1944-07-31) (age 64)
New York
ResidenceImage:Flag of the United States.svg U.S.
NationalityImage:Flag of the United States.svg American
FieldFinance, Economics
InstitutionsHarvard University 1988-
MIT 1970-87
Alma materColumbia University (B.S. - Engineering Mathematics), 1966
Caltech (M.S. - Applied Mathematics), 1967
MIT (Ph.D. - Economics), 1970
Academic advisor  Paul SamuelsonImage:Nobel Prize.png
Known forBlack–Scholes model
ICAPM
Merton's portfolio problem
Jarrow-Turnbull model
Notable prizesNobel Prize in Economics (1997)
Lifetime Achievement in Mathematical Finance (1999)

Robert C. "Bob" Merton (born July 31, 1944), is a leading scholar in the field of finance and was one of three men who, in the early 1970s, developed the mathematics of financial options. Merton was the first to publish a paper expanding our mathematical understanding of the options pricing model and coined the term "Black-Scholes" options pricing model, by enhancing work that was published by Fischer Black and Myron Scholes. Merton authored a paper entitled "The Theory of Rational Option Pricing" which was published the Bell Journal of Economics and Management Science in the spring of 1973.

Merton is credited with bringing academia, specifically finance and mathematics professors, to Wall Street. His Wall Street career began at Salomon Brothers in the 1980s and continued into the following century when he was a Managing Director at JP Morgan.

Merton obtained his PhD in Economics from MIT in 1970, where, studying under Nobel Laureate Paul Samuelson, he helped introduce stochastic calculus into financial economics, allowing the behavior of prices to be described in the precise language of probability. He then applied optimal control theory in order to derive consumption and portfolio allocation rules for economically optimizing agents (see Merton's portfolio problem), and his work has paved the way for the now flourishing field of financial engineering, and quantitative finance which applies his methods to calculate prices for exotic derivatives with arbitrary payoffs.

Contents

[edit] Accomplishments

In 1969 Merton published groundbreaking work on a dilemma that all investors face. Merton's portfolio problem enables people to decide how much of their income they can consume now and of the remaining income, how much of it should be allocated between stocks and bonds to maximize the usefulness of that income.

In 1970 Merton introduced a structural credit risk model. The 'Merton Model' refers to a model that treats equity as an option on the firm's assets. Simply consider equity a call option, the total liabilities the strike price, and the value of the firm's assets the value of the underlying asset. This makes sense theoretically because equity is a residual: equity holders get the upside if things go well, but nothing if things go poorly. A popular commercial version of the Merton Model, the KMV Model, is now widely used. Merton was also the first to introduce the use of continuous time default probabilities to model options on the common stock of a company which can default. This approach, now labeled the reduced form approach, was extended by Stuart Turnbull and Merton's student Robert A. Jarrow and is popularly known as the Jarrow-Turnbull model. The reduced form default probabilities that stem from Merton's insights were introduced commercially by Kamakura Corporation, where Robert Jarrow is director of research, in 2002.

In 1973 Merton introduced the Intertemporal Capital Asset Pricing Model known as ICAPM. ICAPM incorporates explicit hedges that investors make to protect themselves from savings shortfalls or changes in the investment opportunity set.

In 1987 Merton took a sabbatical from MIT and authored Continuous Time Finance (ISBN 0631185089).

In 1997 Merton and Scholes were awarded the Nobel Memorial Prize in Economics for their work on stock options. Fischer Black had already passed away or he would have shared in the prize as well. Given the impact of their work, many believed the prize was long over due.

In 1998 LTCM, of which Merton was a Partner, was at the center of a global liquidity crisis. The Federal Reserve facilitated a group of 19 firms who gathered in New York and provided sufficient liquidity for the banking system to survive. LTCM, however, did not survive.

In 1999 Merton was awarded the lifetime achievement award in mathematical finance. [1]

In 2002 Merton threw himself into the public controversy over how corporations ought to account for the stock options they often award as parts of a compensation package. At that time, accounting rules did not require that options be treated as expenses when issued, and some economists suspected that the practice of keeping this particular form of compensation off the balance sheet contributed to the 1990s bubble in the value of dot-coms and telecoms. Merton himself was among the advocates of expensing stock options. Shortly after Merton advocated expensing options, the FASB changed their rules and began to require expensing options.

In 2005 the Baker Library at Harvard University opened The Merton Exhibit to honor his lifelong achievements and inspire students to pursue academic careers.

In 2006, recognizing the pension crisis, Merton developed SmartNest, a pension management solution that addresses deficiencies associated with traditional defined-benefit and defined-contribution plans. SmartNest Case Study

In 2007 Merton was tapped as Chief Science Officer at Trinsum Group. Trinsum integrates advisory services previously accessible only through the use of multiple providers filling the gap between management consulting and investment banking for objective, real-world advice steeped in financial science. Merton refers to this as "Functional and Structural Finance".

[edit] Personal life

Merton was born in New York, New York and received his Bachelor of Science degree in Engineering Mathematics from the School of Engineering and Applied Science of Columbia University. [2] He then entered the Ph.D. program in Applied Mathematics from Caltech from 1966-1967, and picked up an M.S. there, but then transferred to the Ph.D. program in Economics at MIT. [3]. After receiving his Ph.D. from MIT under the guidance of renowned economist Paul Samuelson, Merton joined the faculty at the MIT Sloan School of Management.

Currently, Merton is a professor at the Harvard Business School; he also holds the rank of University Professor, which is the highest professorial rank at Harvard University.

Merton is also the son of Robert K. Merton, a distinguished sociologist at Columbia University perhaps best known for having coined the phrase "self fulfilling prophecy."

Merton resides in both Cambridge, MA and New York, NY. He has three grown children.

[edit] Select awards

1964 Faculty Scholar Award, Columbia University
1971-72 Salgo-Noren Award for Excellence in Teaching, Massachusetts Institute of Technology
1977-78 Graduate Student Council Teaching Award, Massachusetts Institute of Technology
1983 Leo Melamed Prize, University of Chicago
1985 Roger Murray Prize Competition, Institute for Quantitative Research in Finance
1986 Roger Murray Prize Competition, Institute for Quantitative Research in Finance
1989 Distinguished Scholar Award, Eastern Finance Association
1993 International INA - Accademia Nazionale dei Lincei Prize, National Academy of Lincei, Rome
1993 FORCE Award for Financial Innovation, Fuqua School of Business, Duke University
1993 Financial Engineer of the Year Award, International Association of Financial Engineers
1997 Alfred Nobel Memorial Prize in Economic Sciences
1997 'Heroes Among Us,' Boston Celtics, Boston
1998 Inducted, Derivatives Hall of Fame, Derivatives Strategy Magazine
1998 Michael I. Pupin Medal for Service to the Nation, Columbia University
1999 Distinguished Alumni Award, California Institute of Technology
1999 Mathematical Finance Day Lifetime Achievement Award, Boston University
2002 Risk Hall of Fame, Risk Magazine
2003 Lifetime Achievement Award, Risk Magazine
2003 Nicholas Molodovsky Award, CFA Institute
2004 Graham and Dodd Award for the Best Perspectives Article in 2003, Financial Analyst Journal
2005 Establishment of The Robert C. Merton (1970) Professorship in Financial Economics, MIT
2006 PRMIA Higher Standard Award, Professional Risk Managers’ International Association

[edit] See also

[edit] External links

v • d • e
Nobel Memorial Prize in Economic Sciences: List of Laureates

Milton Friedman (1976) • Bertil Ohlin / James Meade (1977) • Herbert Simon (1978) • Theodore Schultz / Arthur Lewis (1979) • Lawrence Klein (1980) • James Tobin (1981) • George Stigler (1982) • Gérard Debreu (1983) • Richard Stone (1984) • Franco Modigliani (1985) • James M. Buchanan (1986) • Robert Solow (1987) • Maurice Allais (1988) • Trygve Haavelmo (1989) • Harry Markowitz / Merton Miller / William Forsyth Sharpe (1990) • Ronald Coase (1991) • Gary Becker (1992) • Robert Fogel / Douglass North (1993) • John Harsanyi / John Forbes Nash / Reinhard Selten (1994) • Robert Lucas, Jr. (1995) • James Mirrlees / William Vickrey (1996) • Robert C. Merton / Myron Scholes (1997) • Amartya Sen (1998) • Robert Mundell (1999) • James Heckman / Daniel McFadden (2000)


Persondata
NAME Merton, Robert C.
ALTERNATIVE NAMES
SHORT DESCRIPTION American economist
DATE OF BIRTH July 31, 1944
PLACE OF BIRTH New York
DATE OF DEATH
PLACE OF DEATH
ar:روبرت ميرتون

bg:Робърт Мертън ca:Robert Merton de:Robert C. Merton es:Robert C. Merton fr:Robert Merton gd:Robert Merton it:Robert Merton he:רוברט קרהרט מרטון ja:ロバート・マートン pl:Robert C. Merton (ekonomista) pt:Robert Carhart Merton ro:Robert Merton ru:Мертон, Роберт Кархарт fi:Robert Merton sv:Robert C. Merton

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