About

Robert C. 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 received his PhD in Economics from MIT in 1970 and has served on the finance faculty of MIT’s Sloan School of Management until 1988, where he was the J.C. Penney Professor of Management. Merton has held prominent positions at Harvard Business School, including the George Fisher Baker Professor of Business Administration and the John and Natty McArthur University Professor. His research focuses on finance theory, including lifecycle and retirement finance, optimal portfolio selection, capital asset pricing, pricing of derivative securities, credit risk, financial innovation, and systemic risk measurement and management. He is renowned for developing the Black-Scholes-Merton options pricing model, which revolutionized derivatives valuation, and was awarded the Nobel Memorial Prize in Economic Sciences in 1997 for this work. Merton has also contributed significantly to understanding pensions as a stream of income over a lifetime, emphasizing their role in ensuring continuity in living standards. His work has profoundly impacted the global financial system, and he continues to engage in research on macrofinancial systemic risk, financial innovation, and institutional change.

Research topics

• Economics
• Computer Science
• Business
• Computer Security
• Industrial organization
• Mathematics
• Microeconomics
• Monetary economics
• Finance

Selected publications

• Principles of Finance

  Cambridge University Press eBooks · 2025-01-23 · 1 citations

  book

  Written for the MBA or undergraduate first course in finance, as well as follow-on courses, this textbook provides a clear, accessible, and thorough explanation of the principles of finance; how they connect to real-world practice and how they are used to solve problems. Structured around ten unifying principles representing the core tenets of the science, this book imparts basic financial concepts irrespective of the institutional framework, ensuring that students learn about finance in a way that is applicable both now and into the future. Pedagogical features include learning objectives and major takeaways, applications in the world of business, numerous worked examples, key equation boxes highlighting the most important financial equations, quick check questions with solutions, key finance terms with a detailed glossary, and more than 380 homework problems. Online resources include a solutions manual, detailed instructor manual to adapt the book to your course, lectures slides and an 800 question test bank for instructors.

  PublisherDOI

• Trust in Lending <br>

  SSRN Electronic Journal · 2024-01-01

  articleOpen accessSenior author
  PublisherDOI

• Trust in Lending

  The Review of Economics and Statistics · 2024-09-16 · 6 citations

  articleSenior author

  Abstract We develop a theory of trust in lending that distinguishes between reputation and trust. Banks emerge as more trusted lenders than non-banks. We show that trust severs the link between performance and the cost and availability of financing for lenders, but trust can be lost and is difficult to regain. Banks survive an erosion of trust better than non-banks. Banks' trust advantage arises from the lower cost of funding due to insured deposits and an endogenous belief revision channel that complements the effect of the funding cost advantage. The results have novel policy relevance for deposit insurance scope.

  PublisherDOI

• Forecasting and Managing Volatility: An S&P 500 Case Study

  SSRN Electronic Journal · 2024-01-01

  preprintOpen access
  PublisherDOI

• Trust, Transparency, and Complexity

  Review of Financial Studies · 2023 · 30 citations

  Senior authorCorresponding
  • Computer Science
  • Computer Security
  • Business

  Abstract 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 ante third-party verification for information disclosure and trust. Firms with an intermediate level of trust choose an intermediate level of complexity and transparency through disclosure, with more trusted firms choosing greater complexity and lower transparency. The most-trusted firms choose maximum complexity while remaining opaque, eschewing both verification and disclosure.

  PublisherDOI

• convertbonds: Use the Given Parameters to Calculate the European Option Value

  2023-04-24

  datasetOpen access
  PublisherOA PDFDOI

• Practical Applications of On the Valuation of Performance Fees and Their Impact on Asset Managers’ Incentives

  The Journal of Alternative Investments · 2022-02-28

  article

  <b>In</b><b><i>On the Valuation of Performance Fees and Their Impact on Managers’ Incentives</i></b>, from the Summer 2021 issue of <b><i>The Journal of Alternative Investments</i></b>, <b>Wei Dai</b> and <b>Savina Rizova,</b> both at <b>Dimensional Fund Advisors</b>,and <b>Robert C. Merton</b> at the <b>MIT Sloan School of Management</b>, remind investors that performance fees can be valued using option pricing theory. Several researchers have applied an option-based approach to the valuation of hedge fund fees and other alternative investments’ performance fees, but few, if any, have done so for long-only systematic managers. The lack of research in that space is mostly because US legislation in the early 1970s banned mutual funds from charging asymmetric incentive fees. Recently, however, more managers of long-only, systematic, separately managed accounts are charging performance fees. The authors, therefore, focus on these types of accounts while illustrating how to use option pricing theory to value a wide variety of performance fee structures. Increased adoption of performance fees in long-only managed accounts coincides with investors’ increased interest in long-only systematic strategies.

  PublisherDOI

• On the Valuation of Performance Fees and Their Impact on Asset Managers’ Incentives

  The Journal of Alternative Investments · 2021-05-21 · 3 citations

  articleOpen access

  This article provides a robust and practical framework for assessing performance fees. The fee valuation uses standard option pricing models and therefore does not require any expected return or alpha estimate. These features make the framework easy to use, robust, and widely applicable to a variety of fee structures in practice. The authors discuss the incentive impact of performance fees and caution against the unintended consequences for manager behaviors. These implications are especially relevant today, as systematic investing is on the rise and asset owners are increasingly interested in the adoption of performance fees across a broader range of investment styles. <b>TOPICS:</b>Real assets/alternative investments/private equity, manager selection, options, performance measurement <b>Key Findings</b> ▪ This article provides a practical framework for assessing performance fees based on standard option pricing models. The fee valuation does not require any expected return or alpha estimate, making this framework transparent, robust, and widely applicable. ▪ Using the framework, the authors show the incentive impact of performance fees and caution against the unintended consequences for manager behaviors. ▪ The article discusses the implications of performance fees in the context of systematic investing. This discussion is especially relevant today as asset owners are increasingly interested in the broader adoption of performance fee structures beyond traditional alternative investments.

  PublisherOA PDFDOI

• A Look Back and a Way Forward

  Annual Review of Financial Economics · 2021-11-01

  articleSenior author

  In this article, we review the literature studying interactions between climate change and financial markets. We first discuss various approaches to incorporating climate risk in macrofinance models. We then review the empirical literature that explores ...Read More

  PublisherDOI

• No-Fault Default, Chapter 11 Bankruptcy, and Financial Institutions

  SSRN Electronic Journal · 2021-01-01 · 4 citations

  articleOpen access1st authorCorresponding
  PublisherDOI

Frequent coauthors

• Zvi Bodie

  53 shared

• Andrew W. Lo

  26 shared

• Richard T. Thakor

  University of Minnesota

  25 shared

• Arun Muralidhar

  15 shared

• Francesco Giavazzi

  12 shared

• Myron S. Scholes

  12 shared

• Dale F. Gray

  International Monetary Fund

  11 shared

• Zoe Tsesmelidakis

  10 shared

Awards & honors

• Alfred Nobel Memorial Prize in Economic Sciences (1997)
• Financial Engineer of the Year Award from the International…
• 2011 CME Group Melamed-Arditti Innovation Award
• 2013 WFE Award for Excellence from World Federation of Excha…
• Nicholas Molodovsky Award from the CFA Institute