Robert C. Merton

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Robert Carhart Merton (born 31 July 1944) is an American economist, university professor and Nobel laureate in economics.

Contents

Biography

Merton was born in New York City to sociologist Robert K. Merton and Suzanne Carhart. He grew up in Hastings-on-Hudson, NY. He earned a Bachelor of Science in Engineering Mathematics from the School of Engineering and Applied Science of Columbia University, a Masters of Science from the California Institute of Technology, and his doctorate in economics from the Massachusetts Institute of Technology in 1970 under the guidance of Paul Anthony Samuelson. He then joined the faculty of the MIT Sloan School of Management where he taught until 1988.[1] Subsequently, Merton moved to Harvard University, where he was George Fisher Baker Professor of Business Administration from 1988 to 1998 and has held the John and Natty McArthur University Professorship since 1998. On June 11, 2010 it was announced[2] that Merton would retire from Harvard and rejoin the MIT Sloan School of Management. Merton also sits on the QFINANCE Strategic Advisory Board.

Career

Merton has made several seminal contributions for which Samuelson has hailed him as the Newton of Modern Finance. In 1969, Merton published Merton's portfolio problem, which proposed a formula to enable people to decide how much of their income they can consume at present and how much of the remainder should be allocated toward investments. In 1970, he introduced the Merton Model, which treated equity as an option on a firm's assets, and introduced the use of continuous-time default probabilities to model options on the common stock of a company. This was extended by Merton's student Robert A. Jarrow and Stuart Turnbull and is known as the Jarrow-Turnbull model. In 1973, Merton introduced the Intertemporal Capital Asset Pricing Model ICAPM, which incorporates explicit hedges that investors make to protect themselves from savings shortfalls. He published the Merton model for pricing European options (1973), which is an elegantly derived, more generalized pricing formula than the Black-Scholes model. Together, they constitute the Nobel Prize winning Black-Scholes-Merton model.

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