Stephen Ross (economist)

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Stephen Ross
BornFebruary 3, 1944
Boston, Massachusetts
DiedMarch 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)
Onassis Prize (2012)
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 the Yale School of Management [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. [3]

Franco Modigliani Italian-American economist

Franco Modigliani was an Italian-American economist and the recipient of the 1985 Nobel Memorial Prize in Economics. He was a professor at University of Illinois at Urbana–Champaign, Carnegie Mellon University, and MIT Sloan School of Management.

Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital.

MIT Sloan School of Management business school of the Massachusetts Institute of Technology

The MIT Sloan School of Management is the business school of the Massachusetts Institute of Technology, in Cambridge, Massachusetts, United States. MIT Sloan offers bachelor's, master's, and doctoral degree programs, as well as executive education. Its degree programs are among the most selective in the world. MIT Sloan emphasizes innovation in practice and research. Many influential ideas in management and finance originated at the school, including the Black–Scholes model, the Solow–Swan model, the random walk hypothesis, the binomial options pricing model, and the field of system dynamics. The faculty has included numerous Nobel laureates in economics and John Bates Clark Medal winners.

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.

University of Pennsylvania Private Ivy League research university in Philadelphia, Pennsylvania

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Yale School of Management

The Yale School of Management is the graduate business school of Yale University in New Haven, Connecticut. The School awards the Master of Business Administration (MBA), MBA for Executives (EMBA), Master of Advanced Management (MAM), Master's Degree in Systemic Risk, Master's Degree in Global Business & Society, Master's Degree in Asset Management, and Ph.D. degrees, as well as joint degrees with nine other graduate programs at Yale University. As of August 2019, 666 students were enrolled in its MBA program, 134 in the EMBA program, 70 in the MAM program, 32 in the Master of Global Business Studies program, 11 in the Master of Systemic Risk program, and 59 in the PhD program; 122 students were pursuing joint degrees. The School has 90 full-time faculty members, and the dean is Kerwin Kofi Charles.

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. The theory was proposed by the economist Stephen Ross in 1976. The linear factor model structure of the APT is used as the basis for many of the commercial risk systems employed by asset managers.

In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. Essentially, the model uses a "discrete-time" model of the varying price over time of the underlying financial instrument, addressing cases where the closed-form Black–Scholes formula is wanting.

Cox–Ingersoll–Ross model

In mathematical finance, the Cox–Ingersoll–Ross (CIR) model describes the evolution of interest rates. It is a type of "one factor model" as it describes interest rate movements as driven by only one source of market risk. The model can be used in the valuation of interest rate derivatives. It was introduced in 1985 by John C. Cox, Jonathan E. Ingersoll and Stephen A. Ross as an extension of the Vasicek model.

Ross also introduced a rigorous modeling of the agency problem in 1973, as seen from the principal's standpoint. [4]

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.

The American Finance Association (AFA) is an academic organization whose focus is the study and promotion of knowledge of financial economics. It was formed in 1939. Its main publication, the Journal of Finance, was first published in 1946.

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, [5] 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.

Princeton University University in Princeton, New Jersey

Princeton University is a private Ivy League research university in Princeton, New Jersey. Founded in 1746 in Elizabeth as the College of New Jersey, Princeton is the fourth-oldest institution of higher education in the United States and one of the nine colonial colleges chartered before the American Revolution. The institution moved to Newark in 1747, then to the current site nine years later, and renamed itself Princeton University in 1896.

Neoclassical finance is a school of thought that has developed since the mid-1960s, building on earlier developments such as the Austrian School of economics but cross-fertilizing with atomic physics and other heavily quantitative disciplines.

Financial market efficiency

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 was a recipient of a 2006 Smith Breeden Prize, a 2012 Onassis Prize, [6] as well as a 2015 Deutsche Bank Prize for developing models used for assessing prices for options and other assets in the previous 30 years. [7]

Ross chaired the theses for the following economists: Anat Admati, Jonathan Berk, John Y. Campbell, Philip H. Dybvig, William N. Goetzmann, Mark Grinblatt, Leonid Kogan, Stavros Panageas, Paul Pfleiderer, Chester Spatt. [8]

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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. Stephen Ross; Jeffrey Jaffe; Randolph Westerfield (7 October 2015). Corporate Finance. McGraw-Hill Education. ISBN   978-1-259-29588-1.
  4. Ross, Stephen A. "The economic theory of agency: The principal's problem." The American Economic Review 63.2 (1973): 134-139.
  5. Ross, Stephen A. Neoclassical finance. Princeton University Press, 2004.
  6. https://www.onassis.org/initiatives/onassis-prizes/onassis-prizes-2012-awarding
  7. U.S. Economist Ross Wins Deutsche Prize for Pricing Models, The New York Times. Retrieved March 3, 2015.
  8. Ross, Stephen A. (2005). Neoclassical finance. Princeton University Press. ISBN   0691121389. OCLC   423826462.