Robert C. Merton is the School of Management Distinguished Professor of Finance at the MIT Sloan School of Management.
Merton is University Professor Emeritus at Harvard University and was the George Fisher Baker Professor of Business Administration (1988–98) and the John and Natty McArthur University Professor (1998–2010) at Harvard Business School. After receiving a PhD in economics from MIT in 1970, Merton served on the finance faculty of the MIT Sloan School of Management until 1988, at which time he was J.C. Penney Professor of Management. He is currently Resident Scientist at Dimensional Holdings, Inc., where he is the creator of Managed DC, a global integrated retirement-funding solution system that addresses the deficiencies associated with traditional defined-benefit and defined-contribution pension plans.
Merton received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives. He 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.
Merton is the author of Continuous-Time Finance and a coauthor of Cases in Financial Engineering: Applied Studies of Financial Innovation; The Global Financial System: A Functional Perspective; Finance; and Financial Economics. He has also been recognized for translating finance science into practice. Merton received the inaugural Financial Engineer of the Year Award from the International Association for Quantitative Finance (formerly International Association of Financial Engineers), which also elected him a Senior Fellow. He received the 2011 CME Group Melamed-Arditti Innovation Award, and the 2013 WFE Award for Excellence from World Federation of Exchanges. A Distinguished Fellow of the Institute for Quantitative Research in Finance ("Q Group") and a Fellow of the Financial Management Association, Merton received the Nicholas Molodovsky Award from the CFA Institute. He is a member of the Halls of Fame of the Fixed Income Analyst Society as well as Risk and Derivatives Strategy magazines. Mertonreceived Risk’s Lifetime Achievement Award for contributions to the field of risk management.
Merton’s research focuses on finance theory, including lifecycle and retirement finance, optimal portfolio selection, capital asset pricing, pricing of derivative securities, credit risk, loan guarantees, financial innovation, the dynamics of institutional change, and improving the methods of measuring and managing macro-financial risk.
Merton received a BS in engineering mathematics from Columbia University, an MS in applied mathematics from California Institute of Technology, a PhD in economics from MIT, and honorary degrees from ten universities.
Current Research Focus: Professor Merton’s current research focuses on three areas: 1)Lifecycle investing and retirement funding solutions, 2) Measuring and monitoring macrofinancial (systemic) risk, and 3) Financial innovation and the dynamics of financial institutional change.
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)
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.
Bodie, Zvi, Robert C. Merton, and David L. Cleeton. Financial Economics. 2nd ed. NJ: Prentice Hall, 2009. (Overview; Translated into Korean and Hungarian.)
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Lim, Terence, Andrew W. Lo, Robert C. Merton, and Myron S. Scholes. The Derivatives Sourcebook. Foundation and Trends in Finance . Now Publishers, 2006.
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Bodie, Zvi, and Robert C. Merton. Finance. NJ: Prentice Hall, 2000. (Translations in modern and traditional Chinese, Japanese, Spanish, Portuguese, French, Russian, Korean, and Polish.)
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Mason, Scott P., Robert C. Merton, André Perold, and Peter Tufano. Teacher's Manual for Cases in Financial Engineering: Applied Studies of Financial Innovation. Prentice Hall, 1996.
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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.
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.
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.
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.
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.)
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Merton, Robert C. "Theory of Rational Option Pricing." Bell Journal of Economics and Management Science 4, no. 1 (spring 1973): 141–183. (Chapter 8 in Continuous-Time Finance.)
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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.
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.
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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.)
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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.)
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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?
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.
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Merton, Robert C. "The Future of Retirement and Planning." In The Future of Life-Cycle Saving and Investing, edited by Zvi Bodie, Dennis McLeavey, and Laurence B. Siegel. CFA Institute, Research Foundation, 2007.
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Merton, Robert C. "Paul Samuelson and Financial Economics." In Samuelsonian Economics and the Twenty-First Century, edited by Michael Szenberg, Lall Ramrattan, and Aron Gottesman. Oxford: Oxford University Press, 2006.
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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.
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Merton, Robert C. "Foreword." Mathematics of Derivative Securities, edited by M. A.H. Dempster and S. Pliska. Cambridge University Press, 1997.
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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.
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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.
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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.
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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.
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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.)
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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.)
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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.
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Merton, Robert C. "Capital Market Theory and the Pricing of Financial Securities." In Handbook of Monetary Economics, edited by B. Friedman and F. Hahn. Amsterdam: North-Holland Publishing Company, 1990.
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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.)
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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.
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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.
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Merton, Robert C. "Implicit Labor Contracts Viewed as Options: A Discussion of 'Insurance Aspects of Pensions'." In Pensions, Labor and Individual Choice, edited by David A. Wise. Chicago: University of Chicago Press, 1985.
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Mason, Scott P., and Robert C. Merton. "The Role of Contingent Claims Analysis in Corporate Finance." In Recent Advances in Corporate Finance, edited by E. I. Altman and M. G. Subrahmanyam. Homewood, IL: Richard D. Irwin, 1985.
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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.
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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.)
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Merton, Robert C. "Financial Economics." In Paul Samuelson and Modern Economic Theory, edited by E. C. Brown and R. M. Solow. New York: McGraw-Hill, 1983.
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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.)
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Merton, Robert C. "On the Microeconomic Theory of Investment under Uncertainty." In Handbook of Mathematical Economics. Vol. 2, edited by K. Arrow and M. Intriligator. Amsterdam: North-Holland Publishing Company, 1982.
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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.
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Merton, Robert C. "A Reexamination of the Capital Asset Pricing Model." In Studies in Risk and Return, edited by J. Bicksler and I. Friend. Cambridge, MA: Ballinger Publishing Company, 1977.
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Financial institutions have both investors and customers. Investors, such as those who invest in stocks and bonds or private/public-sector guarantors of institutions, expect an appropriate risk-adjusted return in exchange for the financing and risk-bearing that they provide. Customers of a financial intermediary, in contrast, provide financing in exchange for a specific set of services, and do not want the fulfillment of these services to be contingent on the credit risk of the intermediary, even when they are not small, uninformed agents lacking in sophistication. This paper develops a framework that defines the roles of customers and investors in intermediaries, and uses the framework to provide an economic foundation for the aversion to intermediary credit risk on the part of its customers. It further explores the implications of this customer-investor nexus for a host of issues related to how contracts between financial intermediaries and their customers are structured and how risks are shared between them, as well as the consequences of (unexpected) deviations from the ex ante optimal contractual arrangement. We show that the optimality of insulating the customer from the credit risk of the intermediary explains various contractual arrangements, institutions, and regulatory practices observed in practice. Moreover, customers and investors are often intertwined in practice, and so this intertwining provides insights into the adoption of "too-big-to-fail" policies and bailouts by regulators in general. Finally, the approach taken here shows that financial crises may be a consequence of observed but unexpected deviations from the ex ante optimal risk-sharing arrangement between financial intermediaries and their customers.
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.
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.
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.
Merton, Robert C. "A Model of Contract Guarantees for Credit-Sensitive, Opaque Financial Intermediaries." Harvard Business School Working Paper, No. 97-091, May 1997.
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Merton, Robert C., and Zvi Bodie. "A Conceptual Framework for Analyzing the Financial Environment." Harvard Business School Working Paper, No. 95-062, January 1995.
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Merton, Robert C., and Zvi Bodie. "Financial Infrastructure and Public Policy: A Functional Perspective." Harvard Business School Working Paper, No. 95-064, January 1995.
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Bodie, Zvi, and Robert C. Merton. "The Informational Role of Asset Prices: The Case of Implied Volatility." Harvard Business School Working Paper, No. 95-063, January 1995.
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Bodie, Zvi, and R. Merton. "A Framework for the Economic Analysis of Deposit Insurance and Other Guarantees." Harvard Business School Working Paper, No. 92-063, January 1992.
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Merton, Robert C., and Zvi Bodie. "On the Management of Deposit Insurance and Other Guarantees." Harvard Business School Working Paper, No. 92-081, January 1992.
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Bodie, Zvi, and Robert C. Merton. "Pension Reform and Privatization in International Perspective: A Case of Israel." Harvard Business School Working Paper, No. 92-082, January 1992.
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Merton, Robert C., and Terry A. Marsh. "Earnings Variability and Variance Bounds Tests for Rationality of Stock Market Prices." Sloan School of Management Working Paper, No. 1559-84, April 1984.
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Marsh, Terry A., and Robert C. Merton. "Aggregate Dividend Behavior and Its Implications for Tests of Stock Market Rationality." Sloan School of Management Working Paper, No. 1475-83, September 1983.
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Merton, Robert C. "A Dynamic General Equilibrium Model of the Asset Market and Its Application to the Pricing of the Capital Structure of the Firm." Sloan School of Management Working Paper, No. 497-70, December 1970. (Chapter 11 in Continuous-Time Finance.)
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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.
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.
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.
Merton, Robert C. "An Empirical Investigation of the Samuelson Rational Warrant Pricing Theory." January 1969. (Chapter V in Ph.D. dissertation; Class paper, Massachusetts Institute of Technology, spring 1969.)
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Merton, Robert C. "Restrictions on Rational Option Pricing: A Set of Arbitrage Conditions." Massachusetts Institute of Technology (MIT), August 1968. Mimeo.
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