Robert C. Merton

Massachusetts Institute of Technology | MIT · MIT Sloan School of Management

This paper develops a theory that generates an equilibrium relationship between product complexity, transparency, and trust in firms. Complexity, transparency, and the evolution of trust are all endogenous, and equilibrium transparency is nonmonotonic. The least-trusted firms choose the lowest product complexity, remain opaque, and substitute ex an...

This paper analyzes the costs and benefits of a no-fault-default debt structure as an alternative to the typical bankruptcy process. We show that the deadweight costs of bankruptcy can be avoided or substantially reduced through no-fault-default debt, which permits a relatively seamless transfer of ownership from shareholders to bondholders in cert...

Las contribuciones de Robert C. Merton cobran vigencia actual. Con respecto del diseño de los planes para el retiro, en un marco de sistemas deficientes de pensiones, las investigaciones de Merton (1969) y (1971) sobre reglas óptimas de consumo y portafolio durante y después de la vida laboral cobran vigencia contemporánea. Asimismo, Bodie y Merton...

Brazilian policy makers and researchers have discussed the introduction of a complementary pension system to complement the Regime Geral de Previdência Social (RGPS), specially for those that want a retirement income above the RGPS ceiling. This article first recommends that the complementary system must be SUPER (Simple, Universal, Portable, Effic...

Retirement Security; Financial Innovation; A New Pension Bond; A Currency for Retirement

SeLFIES; Financial Innovation; Pension Bond; Retirement Security

With a rapidly aging population, Portugal faces some serious pension challenges including a Social Security system which is under pressure, and pension benefits gradually approaching levels that will require individuals to supplement Social Security with private savings. In addition, Portugal has a low rate of financial literacy and hence transferr...

With a rapidly aging population, Portugal faces some serious pension challenges including a Social Security system which is under pressure, and pension benefits gradually approaching levels that will require individuals to supplement Social Security with private savings. In addition, Portugal has a low rate of financial literacy and hence transferr...

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Japan is facing an interesting retirement challenge with an ageing population and missing instruments to hedge retirement income risk. We propose that the Japanese government issue "SeLFIES" (Standard-of-Living indexed, Forward-starting, Income-only Securities). SeLFIES/JGBS improve retirement security and can be created immediately to help Japan a...

Önerdiğimiz yenilik; ABD, Avustralya, Japonya ve Hindistan’da olduğu gibi, Türkiye’de de emeklilik sistemini iyileştirip, milyonlarca katılımcıya, düşük maliyetli, kolay ve güvenli bir emeklilik yolu açabilir. Zamanlama açısından da Türkiye’de özel emeklilik sisteminde yaşanan zorluklara çözüm ve sosyal dayanışmaya da katkı yapar.

The Australian Treasury Department has issued a report seeking comment on ways to improve retirement income security in Australia (Retirement Income Covenant Position Paper: Stage one of the Retirement Income Framework, May 2018). We recommend a simple innovation by Treasury that can achieve the three principles of an effective comprehensive income...

Financial institutions are financed by both investors and customers. Investors expect an appropriate risk-adjusted return for providing financing and risk bearing. Customers, in contrast, provide financing in exchange for specific services, and want the service fulfillment to be free of the intermediary's credit risk. We develop a framework that de...

French Op-Ed on why the French government should issue a new type of retirement bond

On 7 August 2017, Mark P. Kritzman, CFA, interviewed Robert C. Merton, winner of the 1997 Alfred Nobel Memorial Prize in Economic Sciences, to discuss his student days at Columbia University, Caltech, and MIT; his development of the continuous-time theory of optimal lifetime consumption and portfolio choice as well as his contribution to the develo...

Last month, the Government Accountability Office (GAO) issued a stunning report, “The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security” (GAO-18-11SP), on the U.S.’ retirement preparedness. In the report, it notes, “The U.S. retirement system, and the workers and retirees it was designe...

To address the looming retirement crisis, many governments are introducing new pension programmes tied to employment for uncovered workers (NEST in the UK and Secure Choice in some US states). These attempt to improve access to pensions, and continue a trend of transferring responsibility for retirement security from governments and employers (via...

propose a model for the design of state-run retirement plans. A financial crisis of retirement pensions is brewing in the fifty states. Many private-sector workers, typically at the lower-end of the income spectrum (so-called " uncovered workers "), do not participate in pension plans for a host of reasons. If they retire with low, or no, savings,...

At the Q Group (the Institute for Quantitative Research in Finance) Spring Seminar, held 17–20 April 2016, Martin Leibowitz moderated a discussion of the important issues in finance by panelists Andrew W. Lo, Robert C. Merton, Stephen A. Ross, and Jeremy Siegel.

We have each separately made the case that asset pricing theory and investment practice for funding retirement should focus on how much income the member has in retirement instead of the amount of wealth at retirement. This applies whether the pension benefit is generated by a defined benefit plan or a defined contribution plan. Current practice fo...

Financial institutions have both investors and customers. Investors, such as those who invest in stocks and bonds or private/public-sector guarantors of institutions, expect an appropriate risk-adjusted return in exchange for the financing and risk-bearing that they provide. Customers of a financial intermediary, in contrast, provide financing in e...

Well thank you very much. I greatly appreciate the opportunity to speak to you today and for your taking the time to do so. As an introduction, the topic for today is looking at connectedness in the financial system, and I'll talk about a specific way that connectedness is defined in this context, and we'll talk about developing a new and better wa...

At the fifth annual CFA Institute European Investment Conference on 19 October 2012 in Prague, Robert C. Merton gave a presentation on analyzing and managing macrofinancial risk. This article is based on his talk and on research he carried out with his coauthors.

Firms considered \too big to fail" (TBTF) benefit from access to cheaper funding during crises. Using a comprehensive data set of bond characteristics and prices in the primary and secondary market for a sample of 74 U.S. - financial institutions, we investigate how reduced debt capital costs affect the positions of shareholders and creditors. Issu...

The risk of the banking and insurance system has become an important element in the determination of sovereign risk and vice-versa. We apply several econometric measures of connectedness based on principal-components analysis and Granger-causality networks to the changes of sovereign risk of European countries and credit risk of major European, U.S...

Funding retirement is a growing challenge and it is a global one. Even in countries such as Australia, which embraced defined contribution plans two decades ago, there are questions about the adequacy of individual savings.

Firms considered "too big to fail'' (TBTF) benefit from access to cheaper funding during crises. Using a comprehensive data set of bond characteristics and prices in the primary and secondary market for a sample of 74 U.S. financial institutions, we investigate how reduced debt capital costs affect the positions of shareholders and creditors. Issue...

No abstract available.

I develop a two-country general equilibrium model with firms, governments, and endogenous default decisions. This paper shows that the risk of sovereign default abroad is important in the explanation of the level and the volatility of U.S. equity returns. The intuition is that negative economic shocks deteriorate the fiscal situation of foreign gov...

The Derivatives Sourcebook is a citation study and classification system that organizes the many strands of the derivatives literature and assigns each citation to a category. Over 1800 research articles are collected and organized into a simple web-based searchable database. We have also included the 1997 Nobel lectures of Robert Merton and Myron...

During the last decade, derivatives markets became an asset class of their own and influenced the financial landscape strongly. While the financial sector contributes positively to overall economic growth in many studies up to the mid nineties, a positive contribution of the financial sector to economic growth in mature market economies is less evi...

Paul Samuelson's research contributions to quantitative finance have been foundational and wide-ranging. He was a pioneer in recognizing the importance of option and warrant pricing to finance. His 1965 pricing model introduced geometric Brownian as the prototypical underlying stock price process, developed the partial differential equations for pr...

It is surely a coming of age for financial economics that the field is now covered by Annual Reviews, a not-for-profit organization that has been providing the scientific community with authoritative critical reviews of the most important scholarly advances since 1932, starting with the Annual Review of Biochemistry. Annual Reviews now covers 40 di...

The confluence of three trends in the U.S. residential housing market - rising home prices, declining interest rates, and near-frictionless refinancing opportunities - led to vastly increased systemic risk in the financial system. Individually, each of these trends is benign, but when they occur simultaneously, as they did over the past decade, the...

What we have here, says Merton, against the backdrop of financial crisis, a distinguished group of academics and practitioners discusses the contribution of financial management and innovation to corporate growth and value, along with the pitfalls and unintended consequences of such innovation. The main focus of most panelists is the importance of...

This paper proposes a new approach to measure, analyze, and manage sovereign risk based on the theory and practice of modern contingent claims analysis (CCA). The paper provides a new framework for adapting the CCA model to the sovereign balance sheet in a way that can help forecast credit spreads and evaluate the impact of market risks and risks t...

This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool i...

This article studies the behavior of an individual who can repeatedly alternate between two occupations. Such a career option is analogous to an exotic derivative security: an American reset option. Despite in…nite opportunities to change occupa-tions, an individual faced with mobility costs is shown to always allow time to go by between occupation...

Este documento propone un nuevo enfoque para mejorar el análisis y la gestión del riesgo financiero de una economía nacional por parte del banco central. Se basa en la teoría y práctica moderna del análisis de derechos contingentes (CCA, por contingent claims analysis), el que hoy utilizan con éxito a nivel de banco individual los gerentes, inversi...

With the introduction of the international accounting standards in Europe and dissemination of LDI (Liability Driven Investment) as a new investment standard, the investor demand for super-long end has been rising also in Japan. Under these circumstances, it is required that the Japanese government, as the supplier of the Japanese Government Bond (...

The high cost of international economic and financial crises highlights the need for a comprehensive framework to assess the robustness of national economic and financial systems. This paper proposes a new comprehensive approach to measure, analyze, and manage macroeconomic risk based on the theory and practice of modern contingent claims analysis...

This chapter's appraisal places models of time and uncertainty in household allocation of resources at the center of the Samuelson Contribution. It assesses Samuelson's contributions to the areas of efficient market theory and risk analysis, portfolio selection, and option and warrant pricing. Samuelson found that efficient markets do not allocate...

This article discusses the corporate challenge of providing retirement income to employees while limiting the costs and risks of pension plans to the companies themselves by addressing five main questions: 2006 Morgan Stanley.

This paper examines the empirical question of whether systematic equity risk of US firms as measured by beta from the capital asset pricing model reflects the risk of their pension plans. There are a number of reasons to suspect that it might not. Chief among them is the opaque set of accounting rules used to report pension assets, liabilities, and...

Senior executives typically delegate the responsibility for managing a firm's derivatives portfolio to in-house financial experts and the company's financial advisers. That's a strategic blunder, argues this Nobel laureate, because the inventiveness of modern financial markets makes it possible for companies to double or even triple their capacity...

Senior executives typically delegate the responsibility for managing a firm's derivatives portfolio to in-house financial experts and the company's financial advisers. That's a strategic blunder, argues this Nobel laureate, because the inventiveness of modern financial markets makes it possible for companies to double or even triple their capacity...

Three unnumbered leaves inserted. Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 1970. Vita. Includes bibliographical references. Photocopy.

This article presents an accounting approach for employee stock options based on the insight that the currentperiod compensation expense should reflect only that part of the option value that is earned independent of the obligation of continued employment. Given that the maturity of vested options is typically shortened to 90 days when an employee...

This paper proposes a functional approach to designing and managing the financial systems of countries, regions, firms, households, and other entities. It is a synthesis of the neoclassical, neo-institutional, and behavioral perspectives. Neoclassical theory is an ideal driver to link science and global practice in finance because its prescriptions...

This paper examines the empirical question of whether systematic equity risk of U.S. firms as measured by beta from the Capital Asset Pricing Model reflects the risk of their pension plans. There are a number of reasons to suspect that it might not. Chief among them is the opaque set of accounting rules used to report pension assets, liabilities, a...

This paper proposes a functional approach to designing and managing the financial systems of countries, regions, firms, households, and other entities. It is a synthesis of the neoclassical, neo-institutional, and behavioral perspectives. Neoclassical theory is an ideal driver to link science and global practice in finance because its prescriptions...

Interview with Professor Robert C. Merton at the 1st Meeting of Laureates in Economic Sciences in Lindau, Germany, September 1-4, 2004. Interviewer is freelance journalist Marika Griehsel.

Discussions of financial risk often fail to distinguish between risks that are consciously borne and those that are not. To understand the breeding conditions for financial crises the prime focus of concern should not be simply on large risk-taking per se, but on the unintended, or unanticipated accumulation of large risks by individuals, instituti...

Should stock options be recorded as an expense on a company's income statement and balance sheet, or should they remain where they are, relegated to footnotes? The extraordinary boom in share prices during the Internet bubble made critics of option expensing look like spoilsports. But since the crash, the debate has returned with a vengeance. And n...

Should stock options be recorded as an expense on a company's income statement and balance sheet, or should they remain where they are, relegated to footnotes? The extraordinary boom in share prices during the Internet bubble made critics of option expensing look like spoilsports. But since the crash, the debate has returned with a vengeance. And n...

In this chapter we turn to general multi-period models. We will proceed similarly to Chapter 6. We start by introducing the mathematical model. We then proceed to establish the equivalence of the existence of a linear pricing functional and the validity of the Law of One Price. The next step is the equivalence of the existence of strongly positive...

During the past twenty years, swap contracts have become key financial ‘adapters’ linking diverse national financial systems to the global financial network. Today banks and investment companies around the world use swaps extensively to manage their currency, interest-rate, and equity-market risks and to lower their transaction costs. Yet pension f...

During the past twenty years, swap contracts have become key financial adapters linking diverse national financial systems to the global financial network. Today banks and investment companies around the world use swaps extensively to manage their currency, interest-rate, and equity-market risks and to lower their transaction costs. Yet pension fun...

The origins of much of the mathematics in modern finance can be traced to Louis Bachelier’s 1900 dissertation on the theory of speculation, framed as an option-pricing problem. This work marks the twin births of both the continuous-time mathematics of stochastic processes and the continuous-time economics of derivative-security pricing. In solving...

These speeches were delivered by Nobel Laureates Paul Samuelson and Robert Merton on the occasion of their recognition by the FMA, October 7, 1999, Orlando, Florida Edward J. Kane delivered the introduction.

An important function of the financial system is to serve as a key source of information that helps coordinate decentralized decision-making in various sectors of the economy. Households and investors use interest rates, futures prices and security prices in making their consumption-saving decisions and portfolio allocation decisions. Interest rate...

This paper considers the changes in financial infrastructure and regulation necessary to support welfare-improving financial innovation. Topics discussed include the development of a system of risk accounting, the regulation of OTC derivatives, reform of deposit insurance, pension reform and privatization, and the use of financial technology in imp...

This paper develops a conceptual framework for analyzing the global financial system. The framework has two major objectives: to address differences in institutional structure across borders and to explain changes in these institutional structures over time. Applicability of the framework ranges widely, from analysis of the entire financial system...

Nobel Lecture to the memory of Alfred Nobel, December 9, 1997.