Faculty Finder
photo of Robert C. Merton

Robert C. Merton

John and Natty McArthur University Professor

Contact (617) 495-6678
Overview Biography Publications & Course Materials Current Research Areas of Interest

Books

Bodie, Zvi, Robert C. Merton, and David L. Cleeton. Financial Economics. 2nd ed. N.J.: Prentice Hall, 2009. (Overview.)

Lim, Terence, Andrew W. Lo, Robert C. Merton, and Myron S. Scholes. The Derivatives Sourcebook. Foundations and Trends in Finance. Now Publishers, 2006.

Draghi, Mario, Francesco Giavazzi, and Robert C. Merton. Transparency, Risk Management and International Financial Fragility. Vol. 4, Geneva Reports on the World Economy. International Center for Monetary and Banking Studies, 2003.

Bodie, Zvi, and Robert C. Merton. Finance. N.J.: Prentice Hall, 2000. (Translations in modern and traditional Chinese, Japanese, Spanish, Portuguese, French, Russian, Korean, and Polish.)

Mason, Scott P., Robert C. Merton, André F. Perold, and Peter Tufano. Teacher's Manual for Cases in Financial Engineering: Applied Studies of Financial Innovation. Prentice Hall, 1996.

Crane, D. B., K. A. Froot, Scott P. Mason, André Perold, R. C. Merton, Z. Bodie, E. R. Sirri, and P. Tufano. The Global Financial System: A Functional Perspective. Boston: Harvard Business School Press, 1995.

Mason, Scott P., Robert C. Merton, André Perold, and Peter Tufano. Cases in Financial Engineering: Applied Studies of Financial Innovation. Englewood Cliffs: Prentice Hall, 1995.

Merton, Robert C. Continuous-Time Finance. Oxford, U.K.: Basil Blackwell, 1990. (Rev. ed., 1992.)

Merton, Robert C., ed. The Collected Scientific Papers of Paul A. Samuelson. Vol. 3. Cambridge, Mass.: MIT Press, 1972.

Published Papers

Merton, Robert C. "MIT Roundtable on Corporate Risk Management." Journal of Applied Corporate Finance 20, no. 4 (fall 2008): 20-38. Abstract

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 a capital structure and risk management approach that complement the strategy and operations of the business. Instructive examples are provided by Judy Lewent, former CFO and head of strategic planning at Merck, and Lakshmi Shyam-Sunder, director of finance and risk management at the International Finance Corporation.

But if these represent successful applications of finance theory, what about the large number of cases where the use of derivatives and other innovations has led to high leverage and apparent risk management failures? Part of the current trouble, as pointed out by Andrew Lo, can be attributed to the failure of risk managers and their models to account for highly improbable events—the so-called fat tails of the distribution. But, as Robert Merton suggests in closing, there is a more comprehensive explanation for today's problems: the tendency of market participants to respond to potentially risk-reducing financial innovation by increasing their risk-taking in other areas. "What we have here," says Merton, are two partly offsetting effects of innovation—one that is reducing the risk of companies and their investors, and another that is encouraging greater risk-taking. From a social or regulatory standpoint, the goal is to find the right balance between these two effects or forces.


Close

Merton, Robert C. "Applying Modern Risk Management to Equity and Credit Analysis." CFA Institute Conference Proceedings Quarterly 24 (December 2007): 14-22. Abstract

Traditional conventions of accounting and actuarial science distort the valuation of capital risk in corporations with pension plans because under these conventions, pension assets and liabilities are not included in balance sheet calculations. The modern risk management tools of derivatives technologies can improve both corporate decision making and external analysis of corporations.
Close

Gray, Dale . F., Robert C. Merton, and Zvi Bodie. "Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk." Special Issue on Credit Analysis. Journal of Investment Management 5, no. 4 (Fourth Quarter 2007): 5-28. Abstract

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 transferred from other sectors. This new framework is useful for assessing vulnerability, policy analysis, sovereign credit risk analysis, and design of sovereign risk mitigation and control strategies. Applications for investors in three areas are discussed. First, CCA provides a new framework for valuing, investing, and trading sovereign securities, including sovereign capital structure arbitrage. Second, it provides a new framework for analysis and management of sovereign wealth funds being created by many emerging market and resource rich countries. Third, the framework provides quantitative measures of sovereign risk exposures which facilitates the design of new instruments and contracts to control or transfer sovereign risk.
Close

Merton, Robert C. "Allocating Shareholder Capital to Pension Plans." Journal of Applied Corporate Finance 18, no. 1 (winter 2006): 15-24.

Merton, Robert C. "Observations on Innovation in Pension Fund Management in the Impending Future." PREA Quarterly (winter 2006): 61-67.

Merton, Robert C. "Paul Samuelson and Financial Economics." American Economist 50, no. 2 (fall 2006): 262-300.

Jin, Li, Robert C. Merton, and Zvi Bodie. "Do a Firm's Equity Returns Reflect the Risk of Its Pension Plan?" Journal of Financial Economics 81, no. 1 (July 2006): 1-26.

Mendoza, Roberto G., and Robert C. Merton. "Made to Measure Is the Best Fit for Future Pensions." Op-Ed. The Financial Times, January 6, 2006.

Merton, Robert C. "You Have More Capital than You Think." Harvard Business Review 83, no. 11 (November 2005): 84-94. (HBS Reprint #R0511E.)

Hancock, Peter, Roberto G. Mendoza, and Robert C. Merton. "A Proposal for Expensing Employee Compensatory Stock Options for Financial Reporting Purposes." Journal of Applied Corporate Finance 17, no. 3 (summer 2005): 95-101.

Merton, Robert C. "Swapping Your Country's Risks." Breakthrough Ideas for 2005. Harvard Business Review 83, no. 2 (February 2005): 34-36. (HBS Reprint #RO502A.)

Merton, Robert C., and Zvi Bodie. "The Design of Financial Systems: Towards a Synthesis of Function and Structure." Journal of Investment Management 3, no. 1 (First Quarter 2005): 1-23. (Was Harvard Business School Working Paper No. 02-074, 2002.) (Reprinted in Chinese in Journal of Comparative Studies, Issue 17, March 2005.)

Merton, Robert C. "The Real Problem with Pensions." Forethought. Harvard Business Review 82, no. 12 (December 2004): 21-22. (HBS Reprint #F0412H.)

Merton, Robert C. "Foreword: On Financial Innovation and Economic Growth." Harvard China Review (spring 2004): 2-3.

Mendoza, Roberto G., Robert C. Merton, and Peter Hancock. "A Simple Way to Value Stock Options." The Financial Times, April 2, 2004, 13.

Bodie, Zvi, Robert S. Kaplan, and Robert C. Merton. "Footnote Reporting Distorts Impact of Stock Options." The Boston Globe, March 16, 2003.

Bodie, Zvi, Robert S. Kaplan, and Robert C. Merton. "For the Last Time: Stock Options Are an Expense." Harvard Business Review 81, no. 3 (March 2003): 62-71. (HBS Reprint #R0303D.)

Mendoza, Roberto G., Peter Hancock, and Robert C. Merton. "A Better Way to Motivate Staff." The Financial Times, August 8, 2003. (Comment.)

Merton, Robert C. "Thoughts on the Future: Theory and Practice in Investment Management." Financial Analysts Journal 59, no. 1 (January/February 2003): 17-23. (Winner of the 2003 Graham and Dodd Award for Best Perspectives Article. Reprinted in Harvard College Investment Magazine, spring 2005.)

Bodie, Zvi, Robert S. Kaplan, and Robert C. Merton. "Options Should be Reflected in the Bottom Line." The Wall Street Journal, August 1, 2002.

Bodie, Zvi, and R. Merton. "International Pension Swaps." Journal of Pension Economics and Finance 1 (January 2002): 77-83.

Merton, Robert C. "Commentary: Finance Theory and Future Trends: The Shift to Integration." Risk (July 1999): 48-50.

Merton, Robert C. "Applications of Option-Pricing Theory: Twenty-Five Years Later." American Economic Review 88, no. 3 (June 1998): 323-349.

Merton, Robert C. "A Model of Contract Guarantees for Credit-Sensitive, Opaque Financial Intermediaries." European Finance Review 1, no. 1 (January 1997): 1-13.

Merton, Robert C., and Myron Scholes. "Fischer Black." Journal of Finance 50 (December 1995): 1359-1370.

Merton, Robert C. "Financial Innovation and the Management and Regulation of Financial Institutions." Journal of Banking and Finance 19 (July 1995): 461-481.

Merton, Robert C. "A Functional Perspective of Financial Intermediation." Financial Management 24 (summer 1995): 23-41.

Bernard, V., R. C. Merton, and K. G. Palepu. "Mark-to-Market Accounting for Banks and Thrifts: Lessons from the Danish Experience." Journal of Accounting Research 33, no. 1 (spring 1995): 1-32.

Merton, Robert C. "Influence of Mathematical Models in Finance on Practice: Past, Present and Future." Series A. Philosophical Transactions of the Royal Society of London 347 (June 1994): 451-463. (Reprinted in Financial Practice and Education, spring 1995.)

Merton, Robert C., and André Perold. "Theory of Risk Capital in Financial Firms." Journal of Applied Corporate Finance 6, no. 3 (fall 1993): 16-32.

Merton, Robert C. "Financial Innovation and Economic Performance." Journal of Applied Corporate Finance 4, no. 4 (winter 1992): 12-22.

Merton, Robert C., and Z. Bodie. "On the Management of Financial Guarantees." Financial Management 21 (winter 1992): 87-109.

Bodie, Z., Robert C. Merton, and W. Samuelson. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model." Journal of Economic Dynamics and Control 16, nos. 3-4 (July-October 1992): 427-449.

Merton, Robert C. "The Financial System and Economic Performance." Journal of Financial Services Research 4 (December 1990): 263-300.

Merton, R. "On the Application of the Continuous-Time Theory of Finance to Financial Intermediation and Insurance." The Geneva Papers on Risk and Insurance 14, no. 52 (July 1989): 225-262. (Reproduced as Chapter 14 in Continuous-Time Finance.)

Merton, Robert C. "In Honor of Nobel Laureate, Franco Modigliani." Economic Perspectives 1 (fall 1987): 145-155.

Merton, Robert C. "A Simple Model of Capital Market Equilibrium with Incomplete Information." Journal of Finance 42 (July 1987): 483-509.

Marsh, T. A., and Robert C. Merton. "Dividend Behavior for the Aggregate Stock Market." Journal of Business 60 (January 1987): 1-40.

Merton, Robert C., and T. A. Marsh. "Dividend Variability and Variance Bounds Tests for the Rationality of Stock Market Prices." American Economic Review 76, no. 3 (June 1986): 483-498.

Merton, Robert C., M. S. Scholes, and M. L. Gladstein. "The Returns and Risk of Alternative Put Option Portfolio Investment Strategies." Journal of Business 55 (January 1982): 183-242.

Merton, Robert C., and R. D. Henriksson. "On Market Timing and Investment Performance Part II: Statistical Procedures for Evaluating Forecasting Skills." Journal of Business 54 (October 1981): 513-533.

Merton, Robert C. "On Market Timing and Investment Performance Part I: An Equilibrium Theory of Value for Market Forecasts." Journal of Business 54, no. 3 (July 1981): 363-406.

Merton, Robert C. "On Estimating the Expected Return on the Market: An Exploratory Investigation." Journal of Financial Economics 8 (December 1980): 1-39.

Merton, Robert C. "On the Cost of Deposit Insurance When There Are Surveillance Costs." Journal of Business 51, no. 3 (July 1978): 439-452. (Chapter 20 in Continuous-Time Finance.)

Merton, Robert C., M. S. Scholes, and M. L. Gladstein. "The Returns and Risk of Alternative Call Option Portfolio Investment Strategies." Journal of Business 51 (April 1978): 183-242.

Merton, Robert C. "On the Pricing of Contingent Claims and the Modigliani-Miller Theorem." Journal of Financial Economics 5 (November 1977): 241-249. (Chapter 13 in Continuous-Time Finance.)

Merton, Robert C. "An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees : An Application of Modern Option Pricing Theory." Journal of Banking and Finance 1 (June 1977): 3-11.

Merton, Robert C. "The Impact on Option Pricing of Specification Error in the Underlying Stock Price Returns." Journal of Finance 31, no. 2 (May 1976): 333-350. (http://www.people.hbs.edu/rmerton/Impact on Option Pricing.pdf.)

Merton, Robert C. "Option Pricing When Underlying Stock Returns are Discontinuous." Journal of Financial Economics 3 (January-February 1976): 125-144. (Chapter 9 in Continuous-Time Finance.)

Merton, Robert C. "Theory of Finance from the Perspective of Continuous Time." Journal of Financial and Quantitative Analysis 10 (November 1975): 659-674. (http://www.people.hbs.edu/rmerton/Theoryoffinancefromcontinuoustime.pdf.)

Merton, Robert C. "An Asymptotic Theory of Growth Under Uncertainty." Review of Economic Studies 42, no. 3 (July 1975): 375-393. (Chapter 17 in Continuous-Time Finance.)

Merton, Robert C., and P. A. Samuelson. "Fallacy of the Log-Normal Approximation to Optimal Portfolio Decision Making over Many Periods." Journal of Financial Economics 1 (May 1974): 67-94.

Merton, Robert C. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates." Journal of Finance 29, no. 2 (May 1974): 449-470. (Chapter 12 in Continuous-Time Finance.)

Samuelson, P. A., and Robert C. Merton. "Generalized Mean-Variance Tradeoffs for Best Perturbation Corrections to Approximate Portfolio Decisions." Journal of Finance 29, no. 1 (March 1974): 27-40.

Merton, Robert C., and M. G. Subrahmanyam. "The Optimality of a Competitive Stock Market." Bell Journal of Economics and Management Science 5, no. 1 (spring 1974): 145-170.

Merton, Robert C. "An Intertemporal Capital Asset Pricing Model." Econometrica 41, no. 5 (September 1973): 867-887. (Chapter 15 in Continuous-Time Finance.)

Merton, Robert C. "Book Review of Studies in the Theory of Capital Markets, edited by M.C. Jensen." Journal of Money, Credit & Banking 5, no. 2 (May 1973): 729-730.

Merton, Robert C. "The Relationship between Put and Call Option Prices: Comment." Journal of Finance 28, no. 1 (March 1973): 183-184.

Merton, Robert C. "Theory of Rational Option Pricing." Bell Journal of Economics and Management Science 4, no. 1 (spring 1973): 141-183. (Chapter 8 in Continuous-Time Finance.)

Merton, Robert C. "'Continuous-Time Speculative Processes': Appendix to Paul A. Samuelson's 'Mathematics of Speculative Price'." SIAM Review 15 (January 1973): 34-38.

Merton, Robert C. "An Analytical Derivation of the Efficient Portfolio Frontier." Journal of Financial and Quantitative Analysis 10 (September 1972): 1851-1872.

Merton, Robert C. "Optimum Consumption and Portfolio Rules in a Continuous-Time Model." Journal of Economic Theory 3 (December 1971): 373-413. (Chapter I of Ph.D. dissertation; Chapter 5 in Continuous-Time Finance.)

Samuelson, P. A., and Robert C. Merton. "A Complete Model of Warrant Pricing that Maximizes Utility." Industrial Management Review 10 (winter 1969): 17-46. (Chapter IV of Ph.D. dissertation; Chapter 7 in Continuous-Time Finance.)

Merton, Robert C. "A Golden Golden-Rule for Welfare-Maximization in an Economy with a Varying Population Growth Rate." Western Economic Journal 4 (December 1969): 307-318. (Chapter III of Ph.D. dissertation.)

Merton, Robert C. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case." The Review of Economics and Statistics 51 (August 1969): 247-257. (Chapter II of Ph.D. dissertation; Chapter 4 in Continuous-Time Finance.)

Merton, Robert C. "A 'Motionless' Motion of Swift's Flying Island." Journal of the History of Ideas 27 (April-June 1966): 275-277.

Book Chapters

Merton, Robert C., Paul A. Samuelson and Robert M. Solow. "Nobel Laureate Panel Discussion: What Retirement Means to Me." Chap. 1 in The Future of Life-Cycle Saving and Investing: The Retirement Phase, edited by Zvi Bodie, Laurence B. Siegel and Rodney N. Sullivan, 1-14. Charlottesville: CFA Institute, Research Foundation Publications, 2009. (Monograph.)

Merton, Robert C. Contribution to Harry M. Markowitz, Merton H. Miller, William F. Sharpe, Robert C. Merton, and Myron S. Scholes. Vol. 2, edited by Howard R. Vane and Chris Mulhearn. Pioneering Papers of the Nobel Memorial Laureates in Economics Series. Edward Elgar Publishing, 2009. (Introduction to Part IV.)

Merton, Robert C. Foreword to Financial Derivatives Pricing, by Jarrow, Robert A., xi.-xii. World Scientific, 2008. (Full Text.)

Merton, Robert C. Foreword to Les nouvelles frontieres de l'Entreprise , 11-16. Le Cercle des Economistes, 2008. (Full Text.)

Merton, Robert C. Foreword to The World of Equity Derivatives, 10-11. London: Newsdesk Communications Ltd for Eurex, 2008. (Full Text.)

Merton, Robert C. "A New Generation of Pension Fund Management." Chap. 1 in Innovations in Investment Management, edited by H. Gifford Fong, 1-17. JOIM Conference Series. New York: Bloomberg Press, 2008.

Merton, Robert C. Foreword to Macrofinancial Risk Analysis, by Dale F. Gray and Samuel Malone. John Wiley & Sons, 2008. (Full Text.)

Merton, Robert C. "The Future of Retirement and Planning." In The Future of Life-Cycle Saving and Investing, edited by Zvi Bodie, Dennis McLeavey and Laurence B. Siegel. Research Foundation of CFA Institute, 2007.

Merton, Robert C. "Paul Samuelson and Financial Economics." In Samuelsonian Economics and the Twenty-First Century, edited by Michael Szenberg, Lall Ramrattan and Aron Gottesman. Oxford: Oxford University Press, 2006.

Merton, Robert C. "Future Possibilities in Finance Theory and Finance Practice." In Mathematical Finance - Bachelier Congress 2000, edited by H. Geman, D. Madan, S. Pliska and T. Vorst. Berlin: Springer-Verlag, 2002. (Was HBS Working Paper 01-030.)

Merton, Robert C. Foreword to Risk Management, by Michael Crouhy, Dan Galai and Robert Mark. New York: McGraw Hill, 2001.

Merton, Robert C., and Peter Tufano. "The Global Financial System Project." In The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School, 1980-1995, edited by T. K. McCraw and J. L. Cruikshank. Boston: Harvard Business School Press, 1999.

Merton, Robert C. "Applications of Option-Pricing Theory: Twenty-Five Years Later." In Les Prix Nobel 1997. Stockholm: Nobel Foundation, 1997. (Reprinted in American Economic Review, June 1998.)

Merton, Robert C. Foreword to Mathematics of Derivative Securities, edited by M. A.H. Dempster and S. Pliska. Cambridge University Press, 1997.

Merton, Robert C. "On the Role of the Wiener Process in Finance Theory and Practice: The Case of Replicating Portfolios." In The Legacy of Norbert Wiener: A Centennial Symposium. Vol. 60, edited by D. Jerison, I. M. Singer and D. W. Stroock. PSPM Series. Providence, R.I.: American Mathematical Society, 1997.

Merton, Robert C. Foreword to Managing Derivative Risks, edited by L. Chew. Chichester: John Wiley & Sons, 1996.

Merton, Robert C. and Zvi Bodie. "A Conceptual Framework for Analyzing the Financial Environment." Chap. 1 in The Global Financial System: A Functional Perspective, edited by Dwight B. Crane, Kenneth A. Froot, Scott P. Mason, André Perold, Robert C. Merton, Zvi Bodie, Erik R. Sirri and Peter Tufano, 3-31. Boston: Harvard Business School Press, 1995.

Merton, Robert C. and Zvi Bodie. "Financial Infrastructure and Public Policy: A Functional Perspective." Chap. 8 in The Global Financial System: A Functional Perspective, edited by Dwight B. Crane, Kenneth A. Froot, Scott P. Mason, André Perold, Robert C. Merton, Zvi Bodie, Erik R. Sirri and Peter Tufano, 263-282. Boston: Harvard Business School Press, 1995.

Bodie, Zvi and Robert C. Merton. "The Informational Role of Asset Prices: The Case of Implied Volatility." Chap. 6 in The Global Financial System: A Functional Perspective, edited by Dwight B. Crane, Kenneth A. Froot, Scott P. Mason, André Perold, Robert C. Merton, Zvi Bodie, Erik R. Sirri and Peter Tufano, 197-224. Boston: Harvard Business School Press, 1995.

Merton, Robert C. and Z. Bodie. "Deposit Insurance Reform: A Functional Approach." In Carnegie-Rochester Conference Series on Public Policy. Vol. 38, edited by A. Meltzer and C. Plosser. Amsterdam: Elsevier N.V., 1993. (Full Text.)

Merton, Robert C., and André F. Perold. "Management of Risk Capital in Financial Firms." In Financial Services: Perspectives and Challenges, edited by Samuel L. Hayes III, 215-245. Boston, Mass.: Harvard Business School Press, 1993.

Merton, Robert C. "Operation and Regulation in Financial Intermediation: A Functional Perspective." In Operation and Regulation of Financial Markets, edited by P. Englund. Stockholm: The Economic Council, 1993.

Merton, Robert C. "Optimal Investment Strategies for University Endowment Funds." In Studies of Supply and Demand in Higher Education, edited by C. Clotfelter and M. Rothschild. Chicago: University of Chicago Press, 1993. (Chapter 21 in Continuous-Time Finance.)

Bodie, Zvi, and Robert C. Merton. "Pension Benefit Guarantees in the United States: A Functional Analysis." In The Future of Pensions in the United States, edited by R. Schmitt. Philadelphia: University of Pennsylvania Press, 1993.

Merton, Robert C. "The Changing Nature of Debt and Equity: A Discussion." In Are the Distinctions between Debt and Equity Disappearing? edited by R. W. Kopeke and E. S. Rosengren. Conference Series #33. Federal Reserve Bank of Boston, 1990.

Merton, Robert C. "Capital Market Theory and the Pricing of Financial Securities." In Handbook of Monetary Economics, edited by B. Friedman and F. Hahn. Amsterdam: North-Holland Publishing Company, 1990.

Bodie, Z., A. J. Marcus, and Robert C. Merton. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Tradeoffs." In Pensions in the U.S. Economy, edited by J. Shoven and D. Wise. Chicago: University of Chicago Press, 1988.

Merton, Robert C. "Continuous-Time Stochastic Models." In The New Palgrave: A Dictionary of Economic Theory and Doctrine, edited by John Eatwell, Murray Milgate and Peter Newman. London: MacMillan Press, Ltd., 1987. (Revised in The New Palgrave Dictionary of Money and Finance, London: MacMillan Press, Ltd., 1992.)

Merton, Robert C., Z. Bodie, and A. J. Marcus. "Pension Plan Integration as Insurance against Social Security Risk." In Issues in Pension Economics, edited by Z. Bodie, J. B. Shoven and D. A. Wise. Chicago: University of Chicago Press, 1987.

Merton, Robert C. "On the Current State of the Stock Market Rationality Hypothesis." In Macroeconomics and Finance: Essays in Honor of Franco Modigliani, edited by R. Dornbusch, S. Fischer and J. Bossons. Cambridge: MIT Press, 1987.

Merton, Robert C. "Implicit Labor Contracts Viewed as Options: A Discussion of 'Insurance Aspects of Pensions'." In Pensions, Labor, and Individual Choice, edited by D. A. Wise. Chicago: University of Chicago Press, 1985.

Mason, Scott P., and Robert C. Merton. "The Role of Contingent Claims Analysis in Corporate Finance." In Recent Advances in Corporate Finance, edited by E. I. Altman and M. G. Subrahmanyam. Homewood, Ill.: Richard D. Irwin, 1985.

Fischer, S., and Robert C. Merton. "Macroeconomics and Finance: The Role of the Stock Market." In Essays on Macroeconomic Implications of Financial and Labor Markets and Political Processes. Vol. 21, edited by K. Brunner and A. H. Meltzer. Amsterdam: North-Holland Publishing Company, 1984.

Merton, Robert C. "Financial Economics." In Paul Samuelson and Modern Economic Theory, edited by E. C. Brown and R. M. Solow. New York: McGraw-Hill, 1983.

Merton, Robert C. "On Consumption-Indexed Public Pension Plans." In Financial Aspects of the U.S. Pension System, edited by Z. Bodie and J. Shoven. Chicago: University of Chicago Press, 1983. (Chapter 18 in Continuous-Time Finance.)

Merton, Robert C. "On the Role of Social Security as a Means for Efficient Risk-Bearing in an Economy Where Human Capital is Not Tradeable." In Financial Aspects of the U.S. Pension System, edited by Z. Bodie and J. Shoven. Chicago: University of Chicago Press, 1983.

Merton, Robert C. "On the Mathematics and Economic Assumptions of Continuous-Time Financial Models." In Financial Economics: Essays in Honor of Paul Cootner, edited by W. F. Sharpe and C. M. Cootner. Englewood Cliffs, N.J.: Prentice Hall, 1982. (Chapter 3 in Continuous-Time Finance.)

Merton, Robert C. "On the Microeconomic Theory of Investment under Uncertainty." In Handbook of Mathematical Economics. Vol. 2, edited by K. Arrow and M. Intriligator. Amsterdam: North-Holland Publishing Company, 1982.

Merton, Robert C. "Capital Requirements in the Regulation of Financial Intermediaries: A Discussion." In Proceedings: The Regulation of Financial Institutions. Conference Series #21. Federal Reserve Bank of Boston, 1979.

Merton, Robert C. "A Reexamination of the Capital Asset Pricing Model." In Studies in Risk and Return, edited by J. Bicksler and I. Friend. Cambridge, Mass.: Ballinger, 1977.

Other Papers

Khandani, Amir E., Andrew W. Lo, and Robert C. Merton. "Systemic Risk and the Refinancing Ratchet Effect." Harvard Business School Working Paper, No. 10-023, September 2009. Abstract

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, they impose an unintentional synchronization of homeowner leverage. This synchronization, coupled with the indivisibility of residential real estate that prevents homeowners from deleveraging when property values decline and homeowner equity deteriorates, conspire to create a "ratchet" effect in which homeowner leverage is maintained or increased during good times without the ability to decrease leverage during bad times. If refinancing-facilitated homeowner-equity extraction is sufficiently widespread-as it was during the years leading up to the peak of the U.S. residential real-estate market-the inadvertent coordination of leverage during a market rise implies higher correlation of defaults during a market drop. To measure the systemic impact of this ratchet effect, we simulate the U.S. housing market with and without equity extractions, and estimate the losses absorbed by mortgage lenders by valuing the embedded put-option in non-recourse mortgages. Our simulations generate loss estimates of $1.5 trillion from June 2006 to December 2008 under historical market conditions, compared to simulated losses of $280 billion in the absence of equity extractions.


Close

Gray, Dale F., Robert C. Merton, and Zvi Bodie. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability." Harvard Business School Working Paper, No. 09-015, August 2008. (Revised.) Abstract

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 is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks."  At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees-some explicit and others implicit.  Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis.  The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions.  Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.


Close

Gray, Dale F., Robert C. Merton, and Zvi Bodie. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability." NBER Working Paper Series, No. 13607, November 2007. Abstract

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 is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks." At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees -- some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.
Close

Gray, Dale F., Robert C. Merton, and Zvi Bodie. "A New Framework for Analyzing and Managing Macrofinancial Risks of An Economy." Harvard Business School Working Paper, No. 07-026, 2006. (Also NBER Working Paper Series, No. 12637.)

Jin, Li, Robert C. Merton, and Zvi Bodie. "Do a Firm's Equity Returns Reflect the Risk of Its Pension Plan?" Harvard Business School Working Paper, No. 05-011, 2004. (Also NBER Working Paper Series, No. 10650.)

Draghi, Mario, Francesco Giavazzi, and Robert C. Merton. "Transparency, Risk Management and International Financial Fragility." Harvard Business School Working Paper, No. 03-118, 2003. (Also NBER Working Paper Series, No. 9806.)

Merton, R. "Future Possibilities in Finance Theory and Finance Practice." Harvard Business School Working Paper, No. 01-030, 2000.

Merton, R. "A Model of Contract Guarantees for Credit-Sensitive, Opaque Financial Intermediaries." Harvard Business School Working Paper, No. 97-091, 1997.

Merton, Robert C., and Zvi Bodie. "A Conceptual Framework for Analyzing the Financial Environment." Harvard Business School Working Paper, No. 95-062, 1995.

Merton, Robert C., and Zvi Bodie. "Financial Infrastructure and Public Policy: A Functional Perspective." Harvard Business School Working Paper, No. 95-064, 1995.

Bodie, Zvi, and Robert C. Merton. "The Informational Role of Asset Prices: The Case of Implied Volatility." Harvard Business School Working Paper, No. 95-063, 1995.

Bodie, Zvi, and R. Merton. "A Framework for the Economic Analysis of Deposit Insurance and Other Guarantees." Harvard Business School Working Paper, No. 92-063, 1992.

Merton, Robert C., and Zvi Bodie. "On the Management of Deposit Insurance and Other Guarantees." Harvard Business School Working Paper, No. 92-081, 1992.

Bodie, Zvi, and Robert C. Merton. "Pension Reform and Privatization in International Perspective: A Case of Israel." Harvard Business School Working Paper, No. 92-082, 1992.

Merton, Robert C. "Optimal Portfolio Rules in Continuous Time When the Nonnegativity Constraint on Consumption is Binding." Working Paper, 1989 (In Chapter 6 of Continuous-Time Finance.)

Merton, Robert C., and T. A. Marsh. "Earnings Variability and Variance Bounds Tests for Rationality of Stock Market Prices." MIT Sloan School of Management Working Paper Series, No. 1559-84, 1984.

Marsh, T. A., and Robert C. Merton. "Aggregate Dividend Behavior and Its Implications for Tests of Stock Market Rationality." MIT Sloan School of Management Working Paper Series, No. 1475-83, 1983.

Merton, Robert C. "Continuous-Time Portfolio Theory and the Pricing of Contingent Claims." MIT Sloan School of Management Working Paper Series, 1976.

Merton, Robert C. "A Dynamic General Equilibrium Model of the Asset Market and Its Application to the Pricing of the Capital Structure of the Firm." MIT Sloan School of Management Working Paper Series, No. 497-70, 1970 (Chapter 11 in Continuous-Time Finance.)

Merton, Robert C. "Analytical Optimal Control Theory as Applied to Stochastic and Non-Stochastic Economics." Ph.D. diss., Massachusetts Institute of Technology, 1970.

Merton, Robert C. "An Empirical Investigation of the Samuelson Rational Warrant Pricing Theory." 1969 (Chapter V in Ph.D. dissertation; Class paper, Massachusetts Institute of Technology, spring 1969.)

Merton, Robert C. "Restrictions on Rational Option Pricing: A Set of Arbitrage Conditions." Massachusetts Institute of Technology, 1968. Mimeo.

HBS Course Materials

Merton, Robert C., and Alberto Moel. "Harrington Financial Group." Harvard Business School Case 297-088.

Merton, Robert C., and Alberto Moel. "Savings and Loans and the Mortgage Markets." Harvard Business School Note 297-090.

Merton, Robert C., and Alberto Moel. "Smith Breeden Associates: The Equity Plus Fund (A)." Harvard Business School Case 297-089.