Robert C. Merton

John and Natty McArthur University Professor, Emeritus

Robert C. Merton is University Professor Emeritus at Harvard Business School, where he was the George Fisher Baker Professor of Business Administration from 1988 to 1998 and the John and Natty McArthur University Professor from 1998 until his retirement in 2010.  He is currently the School of Management Distinguished Professor of Finance at MIT’s Sloan School of Management, where he previously served on the finance faculty from 1970 until 1988. Merton is past President of the American Finance Association, a member of the National Academy of Sciences and a fellow of the American Academy of Arts and Sciences. He received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives.

Connecting Web Sites

MIT Web Site

Nobel Prize Biography
Nobel Prize Lecture
Theses of MIT Alumni Nobel Prize Winners
Columbia University SEAS latest Nobel Laureate: Robert C. Merton
N ova documentary about the Black-Merton-Scholes Formula. The film tells the fascinating story of the invention of the Black-Scholes Formula, a mathematical Holy Grail that forever altered the world of finance and earned its creators the 1997 Nobel Prize in Economics.
Petra Conference of Nobel Laureates, Jordan 2005
Bodie-Merton FINANCE textbook
Bodie-Merton-Cleeton FINANCIAL ECONOMICS textbook
Derivatives Sourcebook Web site maintained by MIT LFE. A project to illustrate the wide application of option pricing theory. We have collected, categorized and indexed a list of over 1400 research articles since 1980 that have cited the option-pricing research of Fischer Black, Robert Merton, and Myron Scholes.

Listing of Education, Appointments, and Awards

Education

B.S., Columbia University (Engineering Mathematics), 1966
M.S., California Institute of Technology (Applied Mathematics), 1967
Ph.D., Massachusetts Institute of Technology (Economics), 1970

Honorary Degrees

Masters of Arts, Harvard University, 1989
Doctor of Laws, University of Chicago, 1991
Professeur Honoris Causa, Hautes Etudes Commerciales (France), 1995
Doctor of Economic Science (honoris causa), University of Lausanne, 1996
Doctoris Honoris Causa, University Paris-Dauphine, 1997
Doctor of Management Science (honoris causa), National Sun Yat-sen University, 1998
Doctor of Science (honoris causa), Athens University of Economics and Business, 2003
Doctor Honoris Causa , Universidad Nacional Mayor de San Marcos, Lima, Peru, 2004
Doctor of Philosophy Honoris Causa, Universidad Nacional Federico Villarreal, Lima, Peru, 2004
Doctor of Science, Honoris Causa, Claremont Graduate University, 2008 

Academic Appointments

School of Management Distinguished Professor of Finance, A.P. Sloan School of Management Massachusetts Institute of Technology, 2010 –
University Professor Emeritus, Harvard University, 2010 –
John and Natty McArthur University Professor, Graduate School of Business Administration, Harvard University,1998-2010
George Fisher Baker Professor of Business Administration, Graduate School of Business Administration, Harvard University, 1988-1998
Invited Professor of Finance, Faculte des Sciences Economiques, Universite de Nantes, June 1993
Visiting Professor of Finance, Graduate School of Business Administration, Harvard University, 1987-1988
J.C. Penney Professor of Management, A.P. Sloan School of Management, Massachusetts Institute of Technology,1980-1988
Assistant Professor of Finance, 1970-73, Associate Professor, 1973-74; Professor 1974-80, A.P. Sloan School of Management, Massachusetts Institute of Technology
Research Associate, National Bureau of Economic Research (1979- )
Instructor, Department of Economics, Massachusetts Institute of Technology, 1969-1970
Research Assistant to Paul Samuelson, Massachusetts Institute of Technology, 1968-1970
Other Professional Appointments

Current:

Resident Scientist, Dimensional Fund Advisors (2009- )
Chairman, Board of Directors, Daedalus Software, Inc. (2008- )
Member, Board of Directors, Dimensional SmartNest LLC (2010-)
Member, Board of Directors, Peninsula Banking Group (2003- )
Member, Board of Directors, Community First Financial Group (2003- )
Member, Board of Directors, Vical Inc. (2002- )
Member Quantitative Finance Advisory Board, Department of Applied Mathematics and Statistics, Stony Brook University (2009- )
Member, Board of Advisors, Santa Clara University Center for Innovation in Finance & Investment (2008-  )
Member, International Advisory Board, Middle East Science Fund (2008- )
Member, Board of Policy Advisers, Chinese Academy of Sciences Research Center on Fictitious Economy & Data Science (2008- )
Member, Competitive Markets Advisory Council, CME Group (2004-)
Member, Academic Advisory Board, Real Options Group (1999- )

Past:

Member, MIT Sloan Finance Group Advisory Board (2008-2010)
Member, Board of Directors, Dimensional Funds (2003-2009)
Member, Board of Directors, MF Risk, Inc. (2001-2009)
Senior Advisor, Platinum Grove Asset Management (2008)
Chief Science Officer, Trinsum Group (2007-2008) 
Member, Board of Directors, Trinsum Group (2007-2008)
Member, Board of Directors, Integrated Finance Limited (2002-2007)
Co-Founder, Chief Science Officer, Integrated Finance Limited (2002-2007)
Managing Director, J.P. Morgan Chase (2001)
Senior Advisor, J.P. Morgan & Company, Inc. (1999-2000)
Co-Founder, Management Committee, Long-Term Capital Management, L.P. (1993-1999)
Senior Advisor, Salomon Inc. (1988-1992)
Member, Board of Trustees, College Retirement Equities Fund (1988-1996)
Member, Board of Directors, Travelers Investment Management Company (1987-1991)
Member, Board of Directors, ABT Investment Series (1983-1988)
Member, Board of Directors, ABT Utility Income Fund (1982-1988)
Member, Board of Trustees, ABT Growth and Income Trust (1982-1988)
Member, Board of Directors, Nova Fund (1980-1988)
Member, Advisory Board, AlphaSimplex Group, Cambridge, MA (2001-2007)
Member, Advisory Board, nuServe (2001- 2004)
Member, Advisory Board, eCredit.com (2000-2002 )


Elected Societies and Positions

Member, Tau Beta Pi, Columbia University, 1965
Member, Sigma Xi, Massachusetts Institute of Technology, 1970
Director, American Finance Association, 1982-84; 1987-88
Fellow, Econometric Society, 1983-
Fellow, American Academy of Arts and Sciences, 1986-
President, American Finance Association, 1986
Vice President, The Society for Financial Studies, 1993
Member, National Academy of Sciences, 1993-
Senior Fellow, International Association of Financial Engineers, 1994-
Distinguished Fellow, Institute for Quantitative Research in Finance ('Q Group'), 1997-
Honorary Member, the Bachelier Finance Society, 1997-
Member, The Honorable Order of Kentucky Colonels, Commonwealth of Kentucky, 1999-
FMA Fellow, Financial Management Association, 2000-
Fellow, Society of Fellows, American Finance Association, 2000-
Member, Honorary Board, The International Raoul Wallenberg Foundation, 2003-
Member, Honorary Board, Angelo Roncalli International Committee, 2003-

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, 1986 First Prize, 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, Association for Investment Management and Research (now 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, Massachusetts Institute of Technology
2006 PRIMIA Higher Standard Award, Professional Risk Managers' International Association
2007 40 People of Power & Influence in Finance during the last 40 Years, 40th Anniversary, Institutional Investor magazine
2007 Profile, 20th Anniversary, Risk Magazine
2008 Distinguished Finance Educator Award, Financial Education Association
2008 First Annual Award for Foundational Contributions to Finance, Owen School of Management, Vanderbilt University
2009 Robert A. Muh Award in the Humanities, Arts, and Social Sciences, MIT
2009 Tjailing C. Koopmans Asset Award, Tilburg University
2009 Award of Excellence, The Hall of Excellence, Hastings-on-Hudson High School
2009 Sigma Xi, The Scientific Research Society, Life Member
2010 LECG Award for Outstanding Contributions to Financial Economics
2010 Kolmogorov Medal, University of London

Selected Lectures

1975 Distinguished Speaker Lecture, Western Finance Association
1985 Mortimer Hess Memorial Lecture, Association of the Bar of the City of New York
1988 12th Annual Lecture, Geneva Association, Paris
1992 Scholl Chair in Finance Distinguished Speaker Lecture, DePaul University
1993 Lecture, Discussion Meeting on Mathematical Finance, The Royal Society, London
1993 Keynote, 10th International Conference in Finance, Association Francaise de France
1994 AEA/AFA Speaker, Allied Social Sciences Meetings
1994 Speaker, International Monetary Conference, London
1995 Lecture, Newton Institute Seminar, Isaac Newton Institute for Mathematical Sciences, Cambridge
1995 Keynote, 12th International Conference in Finance, Association Francaise de France
1995 Keynote, 25th Anniversary, Financial Management Association
1996 Oxford University Press and Massachusetts Institute of Technology Sloan School of Management
Distinguished Lectures in Business, Massachusetts Institute of Technology, Cambridge
1996 Donor's Lecture, London Business School, London
1996 Inaugural, Dean's Research Seminar, Harvard Business School
1996 Faculty Inaugural Session, University of Lausanne
1996 Paolo Baffi Lecture on Money and Finance, Bank of Italy, Rome
1997 Edgar Lorch Memorial Lecture, Sigma Xi, Columbia University
1998 Lionel McKenzie Lecture, University of Rochester
1998 Martin H. Crego Lecture, Vassar College
1998 I.E. Block Community Lecture, Society for Industrial and Applied Mathematics
1999 Keynote, Risk Magazine's 5th Annual Derivatives and Risk Management Congress, Boston
2000 Speaker, Boston Economic Club
2000 Speaker, Finance 2000, Boston University
2000 Keynote, First World Congress of Bachelier Finance Society, Paris
2000 Keynote, IMF/World Bank Meetings, Prague
2000 Keynote, Kyoto Symposium, Tokyo
2001 First Nomura Lecture, Mathematical Institute, University of Oxford
2001 Keynote, European Finance Association, Barcelona
2001 First Nash Distinguished Lecture in Quantitative Finance, Carnegie-Mellon University, Pittsburgh
2001 Nobel Centennial, Economics Department, Lund University
2001 Nobel Centennial, Stockholm Institute for Financial Research
2001 Nobels in Venice 2001 - III MILLENNIUM COLLOQUIA
2002 Commencement Speaker, Master of Financial Engineering, Haas School of Business, University of California
2002 Keynote, De Nederlandsche Bank Conference, Amsterdam
2002 Fourth Geneva Conference on the World Economy, International Centre for Monetary and Banking Studies, Geneva
2002 Universita degli Studi di Brescia, Italy
2002 Bocconi University, Milan
2002 Third Millennium Colloquium, Venice
2002 Keynote, 8th Annual Risk Management Conference, ICBI, Geneva
2003 Keynote, Conference on International Accounting Standards, Harvard Law School
2003 Keynote, Annual Meeting Conference, Association of Investment Management and Research, Phoenix
2003 Keynote, 6th Hellenic European Conference on Computer Mathematics and Its Applications, Athens University of Economics and Business
2003 Keynote, 10th Anniversary Risk Management Conference, ICBI, Geneva
2004 Isaacs-Jonas Entrepreneurship Lecture, School of Engineering and Applied Science, Columbia University
2004 Universidad Nacional Mayor de San Marcos, Lima Peru
2004 XIV National Congress of Students of Economics, Peru
2004 Central Bank of Peru, Lima
2004 Nobels in Venice Conference, Venice
2004 Lindau Nobel Prize Winners' Conference, Lindau Germany
2004 Keynote, 14th Annual Derivative Securities and Risk Conference, Cornell University
2004 Keynote, Institute for Quantitative Research in Finance ('Q Group'), Paris
2004 Annual Meeting of Board of Governors, Inter-American Development Bank, Lima Peru
2004 Keynote, 11th Annual Risk Management Conference, ICBI, Geneva
2005 Political Economy Lecture Series, Department of Economics, Harvard University
2005 Keynote, Mathematical Finance Seminar, The Courant Institute of Mathematical Sciences, New York University
2005 Petra Conference of Nobel Laureates, Jordan
2005 Business Leadership Forum, Instituto de Empresa, Madrid
2005 Keynote, 12th Annual Risk Management Conference, ICBI, Geneva
2006 Nancy Schwartz Memorial Lecture, Northwestern University
2006 Keynote, 40th Anniversary Conference Q Group
2006 Keynote, 13th Annual Risk Management Conference, ICBI, Geneva
2007 Keynote, 14th Annual Risk Management Conference, ICBI, Geneva
2007 60th CFA Institute Anniversary Conference, New York
2007 Daimler Series Lecture, Guanghua School of Management, Peking University, Beijing
2007 Lecture, "Observations on Sovereign Wealth and QDII Management: Commercial Opportunities," Asset Managers Association, Shanghai
2008 Keynote, Silver Industry Conference, Singapore
2008 Seminar, National University of Singapore, Singapore
2008 London Business School Distinguished Speaker Lecture
2008 Seminar, CIEBA Meeting Washington, DC
2008 Keynote, Harvard University Law School Islamic Finance Forum
2008 Keynote, HBS Centennial Event, Mexico
2008 Keynote, Boston College Finance Conference, Boston
2008 Marjolin Lecture 27th SUERF Colloquium, Munich
2008 Opening Speech, Aix-en-Provence Economic Forum, Marseille
2008 Keynote, Stochastic Economic Dynamics and Finance Symposium, Denmark
2008 Central Bank of Denmark
2008 Boston University, "The Future of Life-Cycle Saving and Investing Conference"
2008 The Hague
2008 Owen Graduate School of Management, Vanderbilt University, Conference on Financial Innovation 
2008 Keynote, 15th Annual Risk Management Conference, ICBI, Geneva
2008 Keynote, Speech, Global Financial Linkages, Transmission of Shocks, and Asset Prices Conference, European Central Bank, Frankfurt
2008 Finance Lecture, Goethe University, Frankfurt
2009 Harvard Institute for Learning in Retirement
2009 Harvard Business School Global Economic Crisis "Deep Dive" Seminar
2009 IMF Asset Managers Roundtable, Washington, DC
2009 Columbia School of Engineering and Physical Science Research Panel
2009 Keynote, Institutional Money Congress Frankfurt
2009 Robert A. Muh Lecture, MIT
2009 Keynote, Conference - Facing the Crisis: Economic and Social Policies for Turbulent Times, 50th Anniversary of the Inter-American Development Bank, Medellin, Colombia
2009 Van Lanschot Lecture, Tilburg University, Holland
2009 Keynote, European Financial Management Association, Milan
2009 Keynote, World Glaucoma Congress, Boston
2009 Keynote, Money and Banking Conference, Central Bank of Argentina
2009 CME Global Financial Leadership Conference, Chicago Mercantile Exchange
2010 Kolmogorov Lecture, University of London
2010 Nathan and Beatrice Keyfitz Lecture, Fields Institute, Toronto
2010 9th Carroll Round Lecture, Georgetown University
2010 Cambridge Science Festival 2010: "Lunch with a Laureate" Series, MIT
2010 Keynote, 2010 FIAP International Seminar: Developing the Potential of the Individually Funded Pension Systems, Chile

Advisory and Editorial Boards

Current:

Advisory Editor, Review of Development Finance (2009- )
Member, Academic Advisory Board, Journal of Applied Corporate Finance (2008- )
Co-editor, Annual Review of Financial Economics, (2007- )
Advisory Board, Journal of Financial Literature (2004- )
Advisory Board, Annals of Finance (2004- )
Advisory Board, Journal of Investment Management (2002- )
Advisory Board, North Holland Series of Handbooks in Finance (2000- )
Advisory Board, International Journal of Theoretical & Applied Finance (1997- )
Advisory Board, Brookings-Wharton (1997- )
Advisory Board, Journal of Financial Education (1995- )
International Board of Scientific Advisers, Tinbergen Institute (1995- )
Advisory Board, Review of Derivatives Research (1993- )
Advisory Board, Japan Financial Economics Association (1993- )
Associate Editor, Journal of Fixed Income (1991- )
Advisory Board, Mathematical Finance (1989- )
Editorial Board, Finance India (1988- ) 

Past:

Advisory Council, Financial Analysts Journal (2003-2009)
Advisory Board, Journal of Banking and Finance (2003-2007)
Advisory Board, Review of Finance (formerly European Finance Review (1996-2005)
Associate Editor, Journal of Banking and Finance (1977-1979,1992-2003)
Advisory Board, Center for Global Management and Research, George Washington University (1996-2000)
Advisory Board, The New Palgrave Dictionary of Money and Finance (1989-1992)
Selection Editor, Papers and Proceedings, Journal of Finance, July 1986
Co-Editor, Journal of Financial Economics (1974-1977)
Associate Editor, Geneva Papers on Risk and Insurance (1989-1996)
Associate Editor, Journal of Financial Economics (1977-1983)
Associate Editor, Journal of Money, Credit and Banking (1974-1979)
Associate Editor, Journal of Finance (1973-1977)
Associate Editor, International Economic Review (1972-1977)
Founding Committee, Review of Financial Studies (1986)

Interviews

Columbia University School of Engineering Award
Profile: Robert C. Merton in Quantitative Finance, Vol 2 Issue 2 http://quant.iop.org
"Too Young to Retire," interview by Rutger Vahl, DNB Magazine, a publication of the Dutch Central Bank, no 3/4 2002
"A Model Mind," CFA Magazine , July-August 2004, interview with Roger Mitchell
"'Hedge funds' are a safety valve" interview Madrid, Spain, October 2005
"Harvard's Financial Scientist," by Peter Carr, Bloomberg Markets, October 2006
"CFOs : Don't forget pension funds," interview by Joel Chernoff, Pensions and Investments, December 11, 2006
"Derivatives provide security," interview by Kris van Hammet, Het Financiale Dagblad, Spring 2007
"Power & Influence," interview by Michael Peltz, Institutional Investor, p. 91, May 1, 2007
A model prophet," interview by Navroz Patel, Risk, V. 20 N. 6 July 2007, p. 40
"Don argues against annuity with refund," interview by Jeremy Au Yong, The Straits Times, January 11, 2008, Singapore.
"On Markets and Complexity," interview by Nate Nickerson, Technology Review, April 2/2008
"We have all learned," Interview, Institutional Money, 8/3/2007.
Bloomberg Television, Interview: Financial Risk, Now versus the Past, November 2007, Bloomberg Television, Singapore
Nobel Prize: Nobel Thinkers: Robert C. Merton
Nobel Prize: Nobel Thinkers: Paul A. Samuelson
Scully The World Show 2008, Nobel Laureates, Interview
"Under the Hood: Retirement Engine Rebuilt," Right Now, Harvard Magazine, January-February 2009, 9-10
"Lehman failliet laten gaan was fout," interview by Marike Stelligna, Elsevier, The Netherlands
"Whodunit?," interview by Dan Tudball, Wilmott Magazine, England, May 2009, pp. 32-45

Video: Speeches and Seminars

1997 Nobel Prize
1997 Nobel Prize Press Conference Harvard Business School
Haas School of Business video of Commencement Speech by Robert C. Merton
2001 Business, Government and the International Economy, Robert C. Merton and Paul Samuelson, November 19 
2001 First Nomura Lecture, Mathematical Institute, University of Oxford
2001 Keynote, European Finance Association, Barcelona
2001 First Nash Distinguished Lecture in Quantitative Finance, Carnegie-Mellon University, Pittsburgh
2002 Baker Library FEA
2003 NewsHour with Jim Lehrer, July 20, 2003, with Robert C. Merton on Stock Options
2003  Robert C. Merton Keynote Speech at 2003 AIMR Annual Conference
2004 Financial Engineering Graduation Speech, UC Berkeley
2006 Celebrating the Robert C. Merton Professorship, MIT Sloan School of Management, March 28
2006 "How to Pursue Both Comparative Advantage and  Efficient Diversification Risk: An Application of Derivative Securities", Nancy Schwartz Memorial Lecture, Northwestern University, April 5, 2006  View Video.
2006 "Future of Personal Finance", Boston University-Boston Federal Reserve Conference, October 26
2007 CFA Institute Annual Conference, May 2
2008 Keynote, Silver Industry Conference, Singapore
2008 Seminar, National University of Singapore, Singapore
2008 Chicago Board Options Exchange (CBOE) Panel Discussion reported in Barron's by Steven M. Sears, May 12, P. 52  
2008 Harvard Business School Panel, "Turmoil on the Street: Fathoming the Financial Crisis," September 23
2008 Harvard University Panel, "Understanding the Crisis in the Markets: A Panel of Harvard Experts," September 25
2008 Boston University, "The Future of Life-Cycle Saving & Investing Conference," October 23 
2008 Owen Graduate School of Management, Vanderbilt University, Conference on Financial Innovation: 35 Years of Black/Scholes and Merton, October 16
2009 Columbia School of Engineering and Physical Science Research Panel
2009 Robert A. Muh Award in the Humanities, Arts, and Social Sciences, MIT
2009 Harvard Business School Spring Reunion, "Observations on the Financial Crisis"
2009 Keynote, European Financial Management Association, Milan

Books

  1. Financial Economics

    Zvi Bodie, Robert C. Merton and David L. Cleeton

    This book seeks to explain finance through its functions rather than its institutions, concentrating on the three pillars of finance: optimization over time, asset valuation, and risk management.

    Keywords: Economics; Finance; Assets; Risk Management; Risk and Uncertainty; Valuation;

    Citation:

    Bodie, Zvi, Robert C. Merton, and David L. Cleeton. Financial Economics. 2nd ed. NJ: Prentice Hall, 2009. (Overview; Translated into Korean and Hungarian.) View Details
  2. The Global Financial System: A Functional Perspective

    D. B. Crane, K. A. Froot, Scott P. Mason, André Perold, R. C. Merton, Z. Bodie, E. R. Sirri and P. Tufano

    Keywords: corporate finance; Imperfect markets; behavioral finance; Asset Pricing;

    Citation:

    Crane, D. B., K. A. Froot, Scott P. Mason, André Perold, R. C. Merton, Z. Bodie, E. R. Sirri, and P. Tufano. The Global Financial System: A Functional Perspective. Boston: Harvard Business School Press, 1995. View Details

Journal Articles

  1. The Crisis in Retirement Planning

    Robert C. Merton

    Corporate America began to really take notice of the looming retirement crisis in the wake of the dot-com crash, when companies in major industries went bankrupt in large part because of their inability to meet their pension obligations. The result was an acceleration of America's shift away from employer-sponsored pension plans toward defined-contribution (DC) plans—epitomized by the ubiquitous 401(k)—which transfer the investment risk from the company to the employee. With that transfer has come a dangerous shift in investment focus, argues Nobel Laureate Robert C. Merton. Traditional pension plans were conceived and managed to provide members with a guaranteed income. And because that objective filtered right through the scheme, members thought of their benefits in those terms. Ask a member what her pension is worth and she'll reply with an income figure: "two-thirds of my final salary," for example. Most DC schemes, however, are designed and managed as investment accounts with the goal of accumulating the largest possible pot of savings. Communication with savers is framed entirely in terms of assets and returns. Ask a saver what his 401(k) is worth and you'll hear a cash amount and perhaps a lament to the value lost in the financial crisis. The trouble is that investment value and asset volatility are simply the wrong measures if your goal is to secure a particular future income. In this article, Merton explains a liability-driven investment strategy whose aim is to improve the probability of achieving a desired retirement income rather than to maximize the capital value of the savings.

    Citation:

    Merton, Robert C. "The Crisis in Retirement Planning." Harvard Business Review 92, nos. 7/8 (July–August 2014): 43–50. View Details
  2. Transparantie in pensioensector nog ver te zoeken (Adjusted Actuarial Cost Price Conflicts with Transparency Requirement)

    Robert C. Merton and Jan Snippe

    Keywords: Cost; Price; Conflict and Resolution;

    Citation:

    Merton, Robert C., and Jan Snippe. "Transparantie in pensioensector nog ver te zoeken (Adjusted Actuarial Cost Price Conflicts with Transparency Requirement)." Financieele Dagblad (March 4, 2010). (Read Translation.) View Details
  3. MIT Roundtable on Corporate Risk Management

    Robert C. Merton

    Against the backdrop of financial crisis, a distinguished group of academics and practitioners discusses the contribution of financial management and innovation to corporate growth and value, along with the pitfalls and unintended consequences of such innovation. The main focus of most panelists is the importance of a capital structure and risk management approach that complement the strategy and operations of the business. Instructive examples are provided by Judy Lewent, former CFO and head of strategic planning at Merck, and Lakshmi Shyam-Sunder, director of finance and risk management at the International Finance Corporation.

    But if these represent successful applications of finance theory, what about the large number of cases where the use of derivatives and other innovations has led to high leverage and apparent risk management failures? Part of the current trouble, as pointed out by Andrew Lo, can be attributed to the failure of risk managers and their models to account for highly improbable events—the so-called fat tails of the distribution. But, as Robert Merton suggests in closing, there is a more comprehensive explanation for today's problems: the tendency of market participants to respond to potentially risk-reducing financial innovation by increasing their risk-taking in other areas. "What we have here," says Merton, are two partly offsetting effects of innovation—one that is reducing the risk of companies and their investors, and another that is encouraging greater risk-taking. From a social or regulatory standpoint, the goal is to find the right balance between these two effects or forces.

    Keywords: Financial Crisis; Market Participation; Finance; Innovation and Invention; Growth and Development Strategy; Value; Distribution; Capital Structure; Risk Management; Business Ventures; Business Model; Strategy;

    Citation:

    Merton, Robert C. "MIT Roundtable on Corporate Risk Management." Journal of Applied Corporate Finance 20, no. 4 (fall 2008): 20–38. View Details
  4. Applying Modern Risk Management to Equity and Credit Analysis

    Robert C. Merton

    Traditional conventions of accounting and actuarial science distort the valuation of capital risk in corporations with pension plans because under these conventions, pension assets and liabilities are not included in balance sheet calculations. The modern risk management tools of derivatives technologies can improve both corporate decision making and external analysis of corporations.

    Keywords: Risk Management; Valuation; Financial Reporting; Decision Making; Credit; Financial Statements; Capital; Equity; Compensation and Benefits;

    Citation:

    Merton, Robert C. "Applying Modern Risk Management to Equity and Credit Analysis." CFA Institute Conference Proceedings Quarterly 24 (December 2007): 14–22. View Details
  5. Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk

    Dale . F. Gray, Robert C. Merton and Zvi Bodie

    This paper proposes a new approach to measure, analyze, and manage sovereign risk based on the theory and practice of modern contingent claims analysis (CCA). The paper provides a new framework for adapting the CCA model to the sovereign balance sheet in a way that can help forecast credit spreads and evaluate the impact of market risks and risks transferred from other sectors. This new framework is useful for assessing vulnerability, policy analysis, sovereign credit risk analysis, and design of sovereign risk mitigation and control strategies. Applications for investors in three areas are discussed. First, CCA provides a new framework for valuing, investing, and trading sovereign securities, including sovereign capital structure arbitrage. Second, it provides a new framework for analysis and management of sovereign wealth funds being created by many emerging market and resource rich countries. Third, the framework provides quantitative measures of sovereign risk exposures which facilitates the design of new instruments and contracts to control or transfer sovereign risk.

    Keywords: Credit; Investment; Sovereign Finance; Risk Management; Emerging Markets; Market Transactions; Mathematical Methods; Valuation;

    Citation:

    Gray, Dale . F., Robert C. Merton, and Zvi Bodie. "Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk." Special Issue on Credit Analysis Journal of Investment Management 5, no. 4 (Fourth Quarter 2007): 5–28. View Details
  6. A Proposal for Expensing Employee Compensatory Stock Options for Financial Reporting Purposes

    Peter Hancock, Roberto G. Mendoza and Robert C. Merton

    Keywords: Employees; Stock Options; Finance; Reports;

    Citation:

    Hancock, Peter, Roberto G. Mendoza, and Robert C. Merton. "A Proposal for Expensing Employee Compensatory Stock Options for Financial Reporting Purposes." Journal of Applied Corporate Finance 17, no. 3 (summer 2005): 95–101. View Details
  7. The Design of Financial Systems: Towards a Synthesis of Function and Structure

    Robert C. Merton and Zvi Bodie

    Keywords: Design; Finance; System;

    Citation:

    Merton, Robert C., and Zvi Bodie. "The Design of Financial Systems: Towards a Synthesis of Function and Structure." Journal of Investment Management 3, no. 1 (First Quarter 2005): 1–23. (Was Harvard Business School Working Paper No. 02-074, 2002.) (Reprinted in Chinese in Journal of Comparative Studies, Issue 17, March 2005.) View Details
  8. Thoughts on the Future: Theory and Practice in Investment Management

    Robert C. Merton

    Keywords: Theory; Practice; Investment; Management;

    Citation:

    Merton, Robert C. "Thoughts on the Future: Theory and Practice in Investment Management." Financial Analysts Journal 59, no. 1 (January/February 2003): 17–23. (Winner of Graham and Dodd Best Perspectives Award For excellence in financial writing. Reprinted in Harvard College Investment Magazine, spring 2005.) View Details
  9. Mark-to-Market Accounting for Banks and Thrifts: Lessons from the Danish Experience

    Victor L Bernard, Robert C. Merton and Krishna G. Palepu

    Keywords: Fair Value Accounting; Denmark;

    Citation:

    Bernard, Victor L., Robert C. Merton, and Krishna G. Palepu. "Mark-to-Market Accounting for Banks and Thrifts: Lessons from the Danish Experience." Journal of Accounting Research 33, no. 1 (spring 1995): 1–32. View Details
  10. Influence of Mathematical Models in Finance on Practice: Past, Present and Future

    Robert C. Merton

    Keywords: Mathematical Methods; Finance;

    Citation:

    Merton, Robert C. "Influence of Mathematical Models in Finance on Practice: Past, Present and Future." Series A. Philosophical Transactions of the Royal Society of London, Series A, Physical Sciences and Engineering 347 (June 1994): 451–463. (Reprinted in Financial Practice and Education, spring 1995.) View Details
  11. Pension Reform and Privatization in International Perspective: The Case of Israel

    Zvi Bodie and Robert C. Merton

    Keywords: Compensation and Benefits; Perspective; Privatization; Israel;

    Citation:

    Bodie, Zvi, and Robert C. Merton. "Pension Reform and Privatization in International Perspective: The Case of Israel." Riv'on le-kalkalah [Economic Quarterly] 152 (August 1992). (Reprinted in English in The Foundations of Pension Finance, Volume II, Zvi Bodie and E. Philip Davis, eds., Edward Elger, 2000.) View Details
  12. Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model

    Zvi Bodie, Robert C. Merton and William Samuelson

    Keywords: Labor; Supply and Industry; Investment; Decision Choices and Conditions;

    Citation:

    Bodie, Zvi, Robert C. Merton, and William Samuelson. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model." Journal of Economic Dynamics & Control 16, nos. 3-4 (July–October 1992): 427–449. View Details
  13. On the Application of the Continuous-Time Theory of Finance to Financial Intermediation and Insurance

    Robert C. Merton

    Keywords: Theory; Finance; Insurance;

    Citation:

    Merton, Robert C. "On the Application of the Continuous-Time Theory of Finance to Financial Intermediation and Insurance." Geneva Papers on Risk and Insurance 14, no. 52 (July 1989): 225–262. (Reproduced as Chapter 14 in Continuous-Time Finance.) View Details
  14. On Market Timing and Investment Performance Part II: Statistical Procedures for Evaluating Forecasting Skills

    Robert C. Merton and Roy D. Henriksson

    Keywords: Investment; Performance; Mathematical Methods; Forecasting and Prediction;

    Citation:

    Merton, Robert C., and Roy D. Henriksson. "On Market Timing and Investment Performance Part II: Statistical Procedures for Evaluating Forecasting Skills." Journal of Business 54 (October 1981): 513–533. View Details
  15. An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees : An Application of Modern Option Pricing Theory

    Robert C. Merton

    Keywords: Cost; Insurance; Financing and Loans; Price; Theory;

Book Chapters

  1. Measuring and Managing Macrofinancial Risk and Financial Stability: A New Framework

    Dale F. Gray, Robert C. Merton and Zvi Bodie

    This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks." At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees-some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.

    Keywords: Financial Statements; Economy; Financial Condition; Central Banking; Management Analysis, Tools, and Techniques; Management Practices and Processes; Risk Management; Measurement and Metrics; System Shocks;

    Citation:

    Gray, Dale F., Robert C. Merton, and Zvi Bodie. "Measuring and Managing Macrofinancial Risk and Financial Stability: A New Framework." In Financial Stability, Monetary Policy, and Central Banking. Vol. 15, edited by Alfaro A. Rodrigo and Cifuentes S. Rodrigo., 2010. View Details
  2. Nobel Laureate Panel Discussion: What Retirement Means to Me

    Robert C. Merton, Paul A. Samuelson and Robert M. Solow

    Keywords: Retirement;

    Citation:

    Merton, Robert C., Paul A. Samuelson, and Robert M. Solow. "Nobel Laureate Panel Discussion: What Retirement Means to Me." Chap. 1 in The Future of Life-Cycle Saving and Investing: The Retirement Phase, edited by Zvi Bodie, Laurence B. Siegel, and Rodney N. Sullivan, 1–14. Charlottesville: CFA Institute, Research Foundation, 2009. (Monograph.) View Details
  3. Contribution

    Robert C. Merton

    Citation:

    Merton, Robert C. "Contribution." Contribution to Harry M. Markowitz, Merton H. Miller, William F. Sharpe, Robert C. Merton, and Myron S. Scholes. Vol. 2, edited by Howard R. Vane and Chris Mulhearn. Pioneering Papers of the Nobel Memorial Laureates in Economics. Edward Elgar Publishing, 2009. (Introduction to Part IV.) View Details
  4. Foreword

    Robert C. Merton

    Citation:

    Merton, Robert C. "Foreword." Les nouvelles frontières de l'Entreprise: Rencontres économiques d'Aix-en-Provence, 11–16. Cercle des économistes, 2008, French ed. (Full Text.) View Details
  5. A New Generation of Pension Fund Management

    Robert C. Merton

    In talking about pension plans at this point in American economic and corporate history, we need to discuss three linked issues: the defined-benefit (DB) corporate plans that worked for our parents; the defined-contribution (DC) plans we're getting today because corporations no longer want to bear the expense and risk of the DB plan; and how we can reshape the DC plan into something that feels more like a DB plan in the near future. Although this chapter focuses on a U.S. context and corporate pension plans, retirement and asset-management issues are a global challenge, and indeed, while the details vary across geopolitical borders, the fundamentals are shared by employers and employees across the globe. What's happening with the DB plan, why is it happening, and what are the implications for asset markets and asset management?

    Keywords: Asset Management; Investment Funds; Compensation and Benefits; Risk Management; Retirement; United States;

    Citation:

    Merton, Robert C. "A New Generation of Pension Fund Management." Chap. 1 in Innovations in Investment Management, edited by H. Gifford Fong, 1–17. JOIM Conference Series. New York: Bloomberg Press, 2008. View Details
  6. The Global Financial System Project

    Robert C. Merton and Peter Tufano

    Keywords: International Finance; Globalized Markets and Industries; Projects; Banking Industry; Financial Services Industry;

    Citation:

    Merton, Robert C., and Peter Tufano. "The Global Financial System Project." In The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School, 1980-1995, edited by T. K. McCraw and J. L. Cruikshank. Boston: Harvard Business School Press, 1999. View Details
  7. On the Role of the Wiener Process in Finance Theory and Practice: The Case of Replicating Portfolios

    Robert C. Merton

    Keywords: Mathematical Methods;

    Citation:

    Merton, Robert C. "On the Role of the Wiener Process in Finance Theory and Practice: The Case of Replicating Portfolios." In The Legacy of Norbert Wiener: A Centennial Symposium. Vol. 60, edited by D. Jerison, I. M. Singer, and D. W. Stroock. Proceedings of Symposia in Pure Mathematics . Providence, RI: American Mathematical Society, 1997. View Details
  8. A Conceptual Framework for Analyzing the Financial Environment

    Robert C. Merton and Zvi Bodie

    Keywords: Finance; Framework;

    Citation:

    Merton, Robert C., and Zvi Bodie. "A Conceptual Framework for Analyzing the Financial Environment." Chap. 1 in The Global Financial System: A Functional Perspective, by D. B. Crane, K. A. Froot, Scott P. Mason, André Perold, R. C. Merton, Z. Bodie, E. R. Sirri, and P. Tufano, 3–31. Boston: Harvard Business School Press, 1995. View Details
  9. The Informational Role of Asset Prices: The Case of Implied Volatility

    Zvi Bodie and Robert C. Merton

    Keywords: Asset Pricing; Price; Volatility; Information;

    Citation:

    Bodie, Zvi, and Robert C. Merton. "The Informational Role of Asset Prices: The Case of Implied Volatility." Chap. 6 in The Global Financial System: A Functional Perspective, by D. B. Crane, K. A. Froot, Scott P. Mason, André Perold, R. C. Merton, Z. Bodie, E. R. Sirri, and P. Tufano, 197–224. Boston: Harvard Business School Press, 1995. View Details
  10. Financial Infrastructure and Public Policy: A Functional Perspective

    Robert C. Merton and Zvi Bodie

    Keywords: Financial Markets; Financial Institutions; Policy; Government and Politics; Business and Government Relations; Banking Industry; Financial Services Industry;

    Citation:

    Merton, Robert C., and Zvi Bodie. "Financial Infrastructure and Public Policy: A Functional Perspective." Chap. 8 in The Global Financial System: A Functional Perspective, by D. B. Crane, K. A. Froot, Scott P. Mason, André Perold, R. C. Merton, Z. Bodie, E. R. Sirri, and P. Tufano, 263–282. Boston: Harvard Business School Press, 1995. View Details
  11. Deposit Insurance Reform: A Functional Approach

    Robert C. Merton and Zvi Bodie

    Keywords: Banks and Banking; Insurance; Governing Rules, Regulations, and Reforms; Government and Politics; Insurance Industry; Banking Industry;

    Citation:

    Merton, Robert C., and Zvi Bodie. "Deposit Insurance Reform: A Functional Approach." In Carnegie-Rochester Conference Series on Public Policy. Vol. 38, edited by A. Meltzer and C. Plosser. Amsterdam: Elsevier, 1993. View Details
  12. Management of Risk Capital in Financial Firms

    Robert C. Merton and André Perold

    Keywords: Risk Management; Capital; Financial Institutions; Financial Services Industry;

    Citation:

    Merton, Robert C., and André Perold. "Management of Risk Capital in Financial Firms." In Financial Services: Perspectives and Challenges, edited by Samuel L. Hayes III, 215–245. Boston, MA: Harvard Business School Press, 1993. View Details
  13. Operation and Regulation in Financial Intermediation: A Functional Perspective

    Robert C. Merton

    Keywords: Financial Markets; Operations; Governing Rules, Regulations, and Reforms; Government and Politics; Financial Services Industry;

    Citation:

    Merton, Robert C. "Operation and Regulation in Financial Intermediation: A Functional Perspective." In Operation and Regulation of Financial Markets, edited by P. Englund. Stockholm: Ekonomiska rådet (Sweden), 1993. View Details
  14. Optimal Investment Strategies for University Endowment Funds

    Robert C. Merton

    Keywords: Investment Funds; Financial Strategy; Higher Education; Non-Governmental Organizations; Education Industry; Financial Services Industry;

    Citation:

    Merton, Robert C. "Optimal Investment Strategies for University Endowment Funds." In Studies of Supply and Demand in Higher Education, edited by C. Clotfelter and M. Rothschild. Chicago: University of Chicago Press, 1993. (Chapter 21 in Continuous-Time Finance.) View Details
  15. Pension Benefit Guarantees in the United States: A Functional Analysis

    Zvi Bodie and Robert C. Merton

    Keywords: Compensation and Benefits; Government and Politics; United States;

    Citation:

    Bodie, Zvi, and Robert C. Merton. "Pension Benefit Guarantees in the United States: A Functional Analysis." In The Future of Pensions in the United States, edited by R. Schmitt. Philadelphia: University of Pennsylvania Press, 1993. (Reprinted in The Foundations of Pension Finance, Volume I, Zvi Bodie and E. Philip Davis, eds., Edward Elger, 2000.) View Details
  16. The Changing Nature of Debt and Equity: A Discussion

    Robert C. Merton

    Keywords: Borrowing and Debt; Equity; Change;

    Citation:

    Merton, Robert C. "The Changing Nature of Debt and Equity: A Discussion." In Are the Distinctions between Debt and Equity Disappearing? edited by R. W. Kopeke and E. S. Rosengren. Federal Reserve Bank of Boston Conference Series. Federal Reserve Bank of Boston, 1990. View Details
  17. Defined Benefit versus Defined Contribution Pension Plans: What are the Real Tradeoffs

    Zvi Bodie, Alan J. Marcus and Robert C. Merton

    Keywords: Compensation and Benefits; Cost vs Benefits;

    Citation:

    Bodie, Zvi, Alan J. Marcus, and Robert C. Merton. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Tradeoffs." In Pensions in the U.S. Economy, edited by John B. Shoven and David A. Wise. Chicago: University of Chicago Press, 1988. View Details
  18. Continuous-Time Stochastic Models

    Robert C. Merton

    Keywords: Mathematical Methods;

    Citation:

    Merton, Robert C. "Continuous-Time Stochastic Models." In The New Palgrave: A Dictionary of Economic Theory and Doctrine, edited by John Eatwell, Murray Milgate, and Peter Newman. London: Macmillan Press, 1987. (Revised in The New Palgrave Dictionary of Money and Finance, London: MacMillan Press, Ltd., 1992.) View Details
  19. Pension Plan Integration as Insurance against Social Security Risk

    Robert C. Merton, Zvi Bodie and Alan J. Marcus

    Keywords: Compensation and Benefits; Integration;

    Citation:

    Merton, Robert C., Zvi Bodie, and Alan J. Marcus. "Pension Plan Integration as Insurance against Social Security Risk." In Issues in Pension Economics, edited by Zvi Bodie, John B. Shoven, and David A. Wise. Chicago: University of Chicago Press, 1987. View Details
  20. On the Current State of the Stock Market Rationality Hypothesis

    Robert C. Merton

    Keywords: Financial Markets; Stocks; Mathematical Methods;

    Citation:

    Merton, Robert C. "On the Current State of the Stock Market Rationality Hypothesis." In Macroeconomics and Finance: Essays in Honor of Franco Modigliani, edited by R. Dornbusch, S. Fischer, and J. Bossons. Cambridge: MIT Press, 1987. View Details
  21. Implicit Labor Contracts Viewed as Options: A Discussion of 'Insurance Aspects of Pensions'

    Robert C. Merton

    Keywords: Compensation and Benefits; Decision Choices and Conditions; Contracts; Labor and Management Relations; Insurance;

    Citation:

    Merton, Robert C. "Implicit Labor Contracts Viewed as Options: A Discussion of 'Insurance Aspects of Pensions'." In Pensions, Labor, and Individual Choice, edited by D. A. Wise. Chicago: University of Chicago Press, 1985. View Details
  22. Macroeconomics and Finance: The Role of the Stock Market

    Stanley Fischer and Robert C. Merton

    Keywords: Macroeconomics; Financial Markets;

    Citation:

    Fischer, Stanley, and Robert C. Merton. "Macroeconomics and Finance: The Role of the Stock Market." In Essays on Macroeconomic Implications of Financial and Labor Markets and Political Processes. Vol. 21, edited by K. Brunner and A. H. Meltzer. Amsterdam: North-Holland Publishing Company, 1984. View Details
  23. On Consumption-Indexed Public Pension Plans

    Robert C. Merton

    Keywords: Compensation and Benefits; Public Sector;

    Citation:

    Merton, Robert C. "On Consumption-Indexed Public Pension Plans." In Financial Aspects of the U.S. Pension System, edited by Zvi Bodie and John B. Shoven. Chicago: University of Chicago Press, 1983. (Chapter 18 in Continuous-Time Finance. Reprinted in The Foundations of Pension Finance, Volume I, Zvi Bodie and E. Philip Davis, eds., Edward Elger, 2000.) View Details
  24. On the Role of Social Security as a Means for Efficient Risk-Bearing in an Economy Where Human Capital is Not Tradeable

    Robert C. Merton

    Keywords: Risk Management; Human Capital; Compensation and Benefits;

    Citation:

    Merton, Robert C. "On the Role of Social Security as a Means for Efficient Risk-Bearing in an Economy Where Human Capital is Not Tradeable." In Financial Aspects of the U.S. Pension System, edited by Zvi Bodie and John B. Shoven. Chicago: University of Chicago Press, 1983. (Reprinted in The Foundations of Pension Finance, Volume I, Zvi Bodie and E. Philip Davis, eds., Edward Elger, 2000.) View Details
  25. On the Mathematics and Economic Assumptions of Continuous-Time Financial Models

    Robert C. Merton

    Keywords: Mathematical Methods; Economics; Finance;

    Citation:

    Merton, Robert C. "On the Mathematics and Economic Assumptions of Continuous-Time Financial Models." In Financial Economics: Essays in Honor of Paul Cootner, edited by W. F. Sharpe and C. M. Cootner. Englewood Cliffs, NJ: Prentice Hall, 1982. (Chapter 3 in Continuous-Time Finance.) View Details
  26. Capital Requirements in the Regulation of Financial Intermediaries: A Discussion

    Robert C. Merton

    Keywords: Capital; Financial Markets; Financial Institutions; Governing Rules, Regulations, and Reforms; Policy; Business and Government Relations; Financial Services Industry;

    Citation:

    Merton, Robert C. "Capital Requirements in the Regulation of Financial Intermediaries: A Discussion." In Proceedings: The Regulation of Financial Institutions.Federal Reserve Bank of Boston Conference Series. Federal Reserve Bank of Boston, 1979. View Details

Working Papers

  1. Systemic Risk and the Refinancing Ratchet Effect

    Amir E. Khandani, Andrew W. Lo and Robert C. Merton

    The confluence of three trends in the U.S. residential housing market-rising home prices, declining interest rates, and near-frictionless refinancing opportunities-led to vastly increased systemic risk in the financial system. Individually, each of these trends is benign, but when they occur simultaneously, as they did over the past decade, they impose an unintentional synchronization of homeowner leverage. This synchronization, coupled with the indivisibility of residential real estate that prevents homeowners from deleveraging when property values decline and homeowner equity deteriorates, conspire to create a "ratchet" effect in which homeowner leverage is maintained during good times without the ability to decrease leverage during bad times. If refinancing-facilitated homeowner-equity extraction is sufficiently widespread-as it was during the years leading up to the peak of the U.S. residential real-estate market-the inadvertent coordination of leverage during a market rise implies higher correlation of defaults during a market drop. To measure the systemic impact of this ratchet effect, we simulate the U.S. housing market with and without equity extractions, and estimate the losses absorbed by mortgage lenders by valuing the embedded put-option in non-recourse mortgages. Our simulations generate loss estimates of $1.5 trillion from June 2006 to December 2008 under historical market conditions, compared to simulated losses of $280 billion in the absence of equity extractions.

    Keywords: Equity; Mortgages; Interest Rates; Price; Housing; Risk and Uncertainty; United States;

    Citation:

    Khandani, Amir E., Andrew W. Lo, and Robert C. Merton. "Systemic Risk and the Refinancing Ratchet Effect." Harvard Business School Working Paper, No. 10-023, September 2009. (Revised July 2010.) View Details
  2. New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability

    Dale F. Gray, Robert C. Merton and Zvi Bodie

    This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks." At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees—some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.

    Keywords: Financial Crisis; Macroeconomics; Central Banking; Risk Management;

    Citation:

    Gray, Dale F., Robert C. Merton, and Zvi Bodie. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability." Harvard Business School Working Paper, No. 09-015, August 2008. (Revised.) View Details
  3. New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability

    Dale F. Gray, Robert C. Merton and Zvi Bodie

    This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks." At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees—some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.

    Keywords: Financial Crisis; Macroeconomics; Central Banking; Risk Management;

    Citation:

    Gray, Dale F., Robert C. Merton, and Zvi Bodie. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability." NBER Working Paper Series, No. 13607, November 2007. View Details

Cases and Teaching Materials

  1. Smith Breeden Associates: The Equity Plus Fund (A)

    Robert C. Merton and Alberto Moel

    In early 1997, Smith Breeden Associates, a money management and consulting firm, was pondering the future of the Equity Plus Fund. The Equity Plus Fund was an S&P enhanced-index fund that tried to outperform the S&P Index by replicating the index using low-cost derivative strategies and investing the remaining cash in a hedged portfolio of mortgage-backed securities. The fund had performed well since inception, with an annualized total return above that of the S&P Index. However, this performance had not resulted in significant growth of the fund's assets. With its performance record, Smith Breeden had a number of options. It could market the fund more aggressively, it could offer other sector-specific funds, or it could set up an enhanced index fund based on an international stock-market index.

    Keywords: Assets; Cash; Financial Markets; Financial Strategy; Mortgages; Investment Funds; Investment Portfolio; Marketing; Performance; Consulting Industry;

    Citation:

    Merton, Robert C., and Alberto Moel. "Smith Breeden Associates: The Equity Plus Fund (A)." Harvard Business School Case 297-089, February 1997. (Revised March 1998.) View Details
  2. Harrington Financial Group

    Robert C. Merton and Alberto Moel

    In early 1997, Harrington Bank, a small Indiana savings and loan (thrift) wondered what its next move should be. Harrington was acquired in 1988 by the principals of Smith Breeden Associates, a money-management and consulting firm specializing in the application of modern financial technology to the pricing, hedging, and risk management of mortgage securities. The Smith Breeden principals had established an arms-length contract with Harrington, where Smith Breeden advised Harrington on the pricing, hedging, active management, and risk management of Harrington's assets and liabilities. Since the acquisition, the bank had done very well. Assets had grown from $75 million in 1988 to over $520 million at the end of 1996. Its net interest margin had more than tripled, core operating profits had grown by over 400%, and return on equity had been substantially increased. Still, Harrington in 1996 was not an average thrift. 80% of its assets consisted of mortgage-backed securities (vs. 30% for the median thrift), and most of its liabilities were not deposits but other forms of wholesale funding.

    Keywords: Banks and Banking; Mergers and Acquisitions; Price; Risk Management; Mortgages; Contracts; Asset Management; Investment; Financial Services Industry;

    Citation:

    Merton, Robert C., and Alberto Moel. "Harrington Financial Group." Harvard Business School Case 297-088, February 1997. (Revised April 1997.) View Details
  3. Savings and Loans and the Mortgage Markets

    Robert C. Merton and Alberto Moel

    Provides a brief overview of the history of the savings and loans, the savings and loans crisis of the 1980s and 1990s, and the creation of the mortgage markets in the United States. Also explains briefly the most common types of mortgage-backed securities available.

    Keywords: History; Debt Securities; Markets; Mortgages; United States;

    Citation:

    Merton, Robert C., and Alberto Moel. "Savings and Loans and the Mortgage Markets." Harvard Business School Background Note 297-090, February 1997. View Details

Other Publications and Materials