Stephen Ross (economist)

Last updated
Stephen Ross
Born February 3, 1944
Boston, Massachusetts
Died March 3, 2017(2017-03-03) (aged 73)
Nationality United States
Field Financial economics
School or
tradition
Neoclassical economics
Contributions Arbitrage pricing theory
Binomial options pricing model
Cox–Ingersoll–Ross model
Agency problem
Awards Smith Breeden Prize (2006)
Deutsche Bank Prize (2015)

Stephen Alan "Steve" Ross (February 3, 1944 – March 3, 2017) [1] was the inaugural Franco Modigliani Professor of Financial Economics at the MIT Sloan School of Management after a long career as the Sterling Professor of Economics and Finance at Yale [2] . He is known for initiating several important theories and models in financial economics. He is a widely published author in finance and economics, and is coauthor of one of the best-selling Corporate Finance texts.

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He received his B.S. with honors from Caltech in 1965 where he majored in physics, and his Ph.D. in economics from Harvard in 1970, and has taught at the University of Pennsylvania, Yale School of Management, and MIT.

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Ross is best known for the development of the arbitrage pricing theory (mid-1970s) as well as for his role in developing the binomial options pricing model (1979; also known as the Cox–Ross–Rubinstein model). He was an initiator of the fundamental financial concept of risk-neutral pricing. In 1985 he contributed to the creation of the Cox–Ingersoll–Ross model for interest rate dynamics. Such theories have become an important part of the paradigm known as neoclassical finance.

In finance, arbitrage pricing theory (APT) is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The model-derived rate of return will then be used to price the asset correctly—the asset price should equal the expected end of period price discounted at the rate implied by the model. If the price diverges, arbitrage should bring it back into line.

In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. The binomial model was first proposed by Cox, Ross and Rubinstein in 1979. Essentially, the model uses a "discrete-time" model of the varying price over time of the underlying financial instrument. In general, Georgiadis showed that binomial options pricing models do not have closed-form solutions.

Cox–Ingersoll–Ross model

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Ross also introduced a rigorous modeling of the agency problem in 1973, as seen from the principal's standpoint. [3]

Ross served as President of the American Finance Association in 1988. He was named International Association of Financial Engineers' Financial Engineer of the Year in 1996.

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He gave the inaugural lecture of the Princeton Lectures in Finance, sponsored by the Bendheim Center for Finance of Princeton University, in 2001. It became a book in 2004, [4] presenting neoclassical finance and defending it, including such notions as the efficiency and rationality of markets, against its critics, especially those who belong to the behavioral finance tradition.

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There are several concepts of efficiency for a financial market. The most widely discussed is informational or price efficiency, which is a measure of how quickly and completely the price of a single asset reflects available information about the asset's value. Other concepts include functional/operational efficiency, which is inversely related to the costs that investors bear for making transactions, and allocative efficiency, which is a measure of how far a market channels funds from ultimate lenders to ultimate borrowers in such a way that the funds are used in the most productive manner.

Ross is a recipient of a 2006 Smith Breeden Prize, as well as a 2015 Deutsche Bank Prize for developing models used for assessing prices for options and other assets in the last 30 years. [5]

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References

  1. http://www.caltech.edu/news/caltech-mourns-passing-trustee-stephen-ross-bs-65-54292
  2. http://mitsloan.mit.edu/alumni/events/past-events/big-data-conference/stephen-ross/
  3. Ross, Stephen A. "The economic theory of agency: The principal's problem." The American Economic Review 63.2 (1973): 134-139.
  4. Ross, Stephen A. Neoclassical finance. Princeton University Press, 2004.
  5. U.S. Economist Ross Wins Deutsche Prize for Pricing Models, The New York Times. Retrieved March 3, 2015.