Buttonwood robert merton and the effect of time on. Starting with his 1970 doctoral dissertation and continuing to today, robert c. Mertons book presents the continuous time generalization of existing finance theory. In 1997 merton shared a nobel prize in economics for a new method to determine the value of derivatives. In this article i describe mertons main contributions. Merton has revolutionized the theory and practice of finance. The roots of modern continuoustime methods in finance can be traced back to the seminal contributions of merton1969, 1971, 1973b. World scientific reference on contingent claims analysis in corporate finance. In this article i describe merton s main contributions. In this essay i describe mertons main contributions. In his essay on ramsey as an economist, john maynard keynes alludes to economics in the following terms. Mertons widely used text provides an overview and synthesis of finance theory from the perspective of continuoustime analysis. Merton is the school of management distinguished professor of finance at mit sloan school of management, and the john and natty mcarthur university professor emeritus at harvard university he was the george fisher baker professor of business administration 198898 and the john and natty mcarthur university professor 19982010 at harvard business school. Optimum consumption and portfolio rules in a continuous.
Merton, awarded the 1997 nobel memorial prize in economics, was born in new york city on 31 july 1944. I introduction m ost models of portfolio selection have been oneperiod models. Pdf on jul 1, 1989, robert c merton and others published on the application of the continuoustime theory of finance to financial. It covers individual financial choice, corporate finance, financial intermediation, capital markets, and selected topics on. Continuoustime portfolio theory and the pricing of contingent claims. The introduction of continuoustime stochastic models the ito calculus to the theory of household consumption and investment decisions. Robert merton, along with myron scholes, received the 1997 nobel prize in economics for a new method to determine the value of derivatives see the biography for myron scholes for a discussion of the significance of this contribution to knowledge. Merton, a professor of sociology at the columbia university and his mother was suzanne carhart from a methodist quaker family from new jersey. A good representative section,demonstrating his technique throughout the book,is contained in his generalization of the tobinmarkowitz mean variance approach using the log normal distribution to artificilly minimize the presence of outlierspp. Pdf on the application of the continuoustime theory of finance. In 1997, merton shared a nobel prize in economics for a new method to determine the value of derivatives.
Robert cox merton born july 31, 1944 is an american economist, nobel memorial prize in economic sciences laureate, and professor at the mit sloan school of management, known for his pioneering contributions to continuoustime finance, especially the first continuoustime option pricing model, the blackscholesmerton model. Mt451 continuoustime finance introduction to portfolio selection and capital market theory static analysis. Finance theorists were able to apply the same toolkit to solve related problems, says hugues langlois of hec paris, a. Continuoustime methods in finance columbia business school. Merton is university professor emeritus at harvard university and was the george fisher baker professor of business administration 198898 and the john and natty mcarthur university professor 19982010 at harvard business school. It develops the continuoustime mathematical modeling of finance, provides an overview and synthesis of finance theory from the perspective of continuoustime. The introduction of continuoustime stochastic models the ito calculus. Merton 1969 pioneered the use of continuoustime modeling in.
Mertons widelyused text provides an overview and synthesis of finance theory from the perspective of continuoustime analysis. Mertons most popular book is continuoustime finance. It develops the continuous time mathematical modeling of finance, provides an overview and synthesis of finance theory from the perspective of continuous time. In 1993 merton cofounded hedge fund longterm capital management. In 1969, as one of his steps toward developing a formula for valuing options. Mertons portfolio problem is a well known problem in continuoustime finance and in particular intertemporal portfolio choice. Robert c merton an overview and synthesis of finance theory from the perspective of continuoustime analysis that covers individual financial choice, corporate finance, financial intermediation, capital markets, and.
Carnegierochester conference series on public policy, vol. Robert merton independently formulated the problem by stochastic calculus of course in continuous time as mentioned below, which led to the name blackscholesmerton formula for options pricing, which is today still being used in wall street in us, the city in london and derivatives market beyond. Merton sloan school of management, massachusetts institute of technology, cambridge, massachusetts 029 received september 30, 1970 1. I examine the combined problem of optimal portfolio selec tion and consumption rules for an individual in a continuoustime model where his income is. Merton is the school of management distinguished professor of finance at the mit sloan school of management. Foreword a great economist of an earlier generation said that, useful though economic theory is for understanding the world, no one would go to an economic theorist for advice on how to run a brewery or produce a. Continuoustime portfolio theory and the pricing of contingent claims robert c. Merton in 1969 both for finite lifetimes and for the infinite case. Foreword a great economist of an earlier generation said that, useful though economic theory is for understanding the world, no one would go to an economic theorist for advice on how to run a brewery or produce a mousetrap.
Robert cox merton born july 31, 1944 is an american economist, nobel memorial prize in economic sciences laureate, and professor at the mit sloan school of management, known for his pioneering contributions to continuoustime finance, especially the first continuoustime option pricing model, the blackscholes formula. It covers individual finance choice, corporate finance, financial intermediation, capital markets, and selected topics on the interface between private and public finance. It covers individual financial choice, corporate finance, financial intermediation, capital markets, and selected topics on the interface between private and public finance. It covers individual finance choice, corporate finance, financial intermediation, capital markets, and selected topics on. Mertons technique of dynamic hedging in continuous time provided a bridge between the theoretical completemarkets equilibrium model of kenneth arrow and the real world of personal financial planning and. Journal of economic theory 3, 3734 1971 optimum consumption and portfolio rules in a continuoustime model robert c. Introduction the theory of portfolio selection in continuoustime has as its foundation two assumptions.