RISKY THEORY SCORES FOR PAIR; AMERICAN PROFESSORS WIN ECONOMICS NOBEL.Byline: Eric R. Quinones Associated Press Associated Press: see news agency. Associated Press (AP) Cooperative news agency, the oldest and largest in the U.S. and long the largest in the world. Two Americans shared the Nobel prize Nobel Prize, award given for outstanding achievement in physics, chemistry, physiology or medicine, peace, or literature. The awards were established by the will of Alfred Nobel, who left a fund to provide annual prizes in the five areas listed above. for economics Tuesday for helping devise a way to value derivatives, the risky investments that can make fortunes but are notorious for helping ruin Britain's oldest bank and Orange County. Professors Robert C. Merton
Robert Cohart "Bob" Merton (born July 31, 1944), is a leading scholar in the field of finance and was one of three men who, in the early 1970s, developed the of Harvard University Harvard University, mainly at Cambridge, Mass., including Harvard College, the oldest American college. Harvard College Harvard College, originally for men, was founded in 1636 with a grant from the General Court of the Massachusetts Bay Colony. and Myron S. Scholes of Stanford University Stanford University, at Stanford, Calif.; coeducational; chartered 1885, opened 1891 as Leland Stanford Junior Univ. (still the legal name). The original campus was designed by Frederick Law Olmsted. David Starr Jordan was its first president. were lauded by the Royal Swedish Academy of Sciences The Royal Swedish Academy of Sciences or Kungliga Vetenskapsakademien is one of the Royal Academies of Sweden. The Academy is an independent, non-governmental scientific organization which acts to promote the sciences, primarily the natural sciences and mathematics. for developing a formula for pricing derivatives such as stock options. The work helped build what now is a $70 trillion global market. ``People don't recognize it, but their contributions helped make everybody's life a lot better,'' said Robert Brusca, chief economist at Nikko Securities International Inc. in New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of . Derivatives are securities linked to an underlying asset, such as stocks, bonds or interest rates. They were designed to reduce the risks faced by global businesses in volatile markets, but have also become a part of many people's personal finances. Derivatives make it possible, for example, to refinance home mortgages when interest rates are falling. ``A financial instrument that helps people deal with risk is pervasive in all parts of the economy,'' said Frederic Mishkin, an economics professor at Columbia Business School Columbia Business School (part of Columbia University), officially named the Columbia University Graduate School of Business, and also known as CBS, was established in 1916 to provide business training and professional preparation for undergraduate and graduate . ``If you ask what idea in the last 50 or 60 years coming from economic research has had the biggest impact on the world, this is it,'' said Avainash Dixit, an economics professor at Princeton University. There are currently $70 trillion worth of derivatives being traded worldwide - nearly 10 times the U.S. gross domestic product, according to the Securities and Exchange Commission. But such investments have a dark side: Britain's oldest bank, Barings, collapsed in 1995 after a single trader lost huge sums in the derivatives market by betting the wrong way on the course of Tokyo stocks. In 1994, Orange County lost $1.64 billion in part from derivatives investments that guessed wrong on the direction of interest rates, leading to the nation's largest municipal bankruptcy. Procter & Gamble, one of America's top blue chip companies, lost more than $100 million on soured derivative investments that same year. Scholes originally developed the theory on how to value derivatives working with Fischer Black, who died in 1995. After the Black-Scholes formula on valuing stock options was published in 1973, Merton helped apply the work to additional markets. Scholes said he was ecstatic and surprised to share the $1 million prize with Merton. Both men are also partners in Long-Term Capital Management Long-Term Capital Management (LTCM) was a hedge fund founded in 1994 by John Meriwether (the former vice-chairman and head of bond trading at Salomon Brothers). On its board of directors were Myron Scholes and Robert C. , a private investment firm in Greenwich, Conn., where Scholes lives. Scholes, 56, is a professor emeritus at Stanford. He is the third Stanford professor to win the economics prize and the university's 16th Nobel winner overall. Merton, a 53-year-old professor of administration at Harvard Business School Harvard Business School, officially named the Harvard Business School: George F. Baker Foundation, and also known as HBS, is one of the graduate schools of Harvard University. , said the news put him ``in a state of shock.'' Both men said they wished Black was alive to share the prize with them. Merton is the fourth Harvard winner of the economics prize and the school's 35th overall. Merton earned his doctorate in economics in 1970 at the Massachusetts Institute of Technology Massachusetts Institute of Technology, at Cambridge; coeducational; chartered 1861, opened 1865 in Boston, moved 1916. It has long been recognized as an outstanding technological institute and its Sloan School of Management has notable programs in business, in 1970. Scholes earned his at the University of Chicago in 1969. The Nobel citation also noted Merton's work in analyzing spending and investment decisions, as well as Scholes' work in clarifying the impact of dividends on stock market values. The Nobel Memorial Prize in Economic Sciences Nobel Memorial Prize in Economic Sciences: see Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel under Nobel Prize. is the newest of the Nobels. It is not one of the original five created by Nobel, the inventor of dynamite who endowed the prizes in his will. The Swedish Central Bank persuaded the Nobel Foundation in 1968 to let it endow the award. It is the fourth Nobel prize bestowed this year following awards for peace and literature. The physics and chemistry winners are to be named today. All the prizes are presented Dec. 10, the anniversary of Nobel's death. THE WINNERS Robert Merton and Myron Scholes are partners in Long-Term Capital Management in Greenwich, Conn., where Scholes lives. In the 1960s, with Merton, Scholes and the late Fischer Black collaborated in a formula for valuing options and other derivatives in financial markets. ROBERT C. MERTON: 53, a native of New York, received his bachelor's degree in engineering mathematics in 1966 from Columbia University, where his father was a professor. A master's in applied mathematics from the California Institute of Technology California Institute of Technology, at Pasadena, Calif.; originally for men, became coeducational in 1970; founded 1891 as Throop Polytechnic Institute; called Throop College of Technology, 1913–20. came a year later, followed by a doctorate in economics from the Massachusetts Institute of Technology. Taught at MIT's Sloan School of Management from 1970 to 1988 before moving to the Harvard Business School. His reaction to winning: ``I'm in a state of shock.'' MYRON S. SCHOLES: 56, a native of Timmins, Ontario, and now an American citizen, received his bachelor's degree at McMaster University in Canada in 1961. His master's in business administration was awarded in 1964 by the University of Chicago, where he earned his doctorate in 1969 for finance. Taught at the Massachusetts Institute of Technology and the University of Chicago before joining the Stanford faculty in 1981. He is a professor emeritus at Stanford. Divorced, the father of two grown daughters. His reaction to winning: ``I was ecstatic and really surprised and pleased - and all the other words one can say.'' BLACK-SCHOLES FORMULA Professors Robert C. Merton of Harvard University and Myron S. Scholes of Stanford University have been awarded the Nobel Prize in economics The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly called the Nobel Prize in Economics, is a prize awarded each year for outstanding intellectual contributions in the field of economics. . Their method to determine the value of derivatives is considered one of the foremost contributions to economic science over the last 25 years. This formula helped build derivatives into a $70 trillion global market. Derivatives are financial investments whose values are derived from an underlying asset. Four major derivative markets Derivative markets Markets for derivative instruments. : Interest rates; Stocks and bonds; Currency; Commodities CAPTION(S): 2 Boxes, 2 Photos Box: (1) THE WINNERS (See text) (2) BLACK-SCHOLES FORMULA (See text) Photo: (1--Color) No caption (Robert C. Merton) (2--Color) No caption (Myron S. Scholes) |
|
||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion