Contingent Claims Analysis and Life-Cycle Finance

Bodie, Zvi; Ruffino, Doriana; Treussard, Jonathan

doi:10.2139/ssrn.1078864

Cited by 6 publications

(7 citation statements)

References 10 publications

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“…Conceived at the outset as a parallel development to Merton's joint research with Bodie, and completed in 1997, was a textbook on basic finance that applies the functional perspective and presents the subject as a set of principles much like first courses in economics and the physical sciences (Bodie, Merton & Cleeton 2010). Financial Economics was intended for use in its current form anywhere in the world.…”

Section: Financial Economics Textbookmentioning

confidence: 99%

Robert C. Merton and the Science of Finance

Bodie

2020

Annu. Rev. Financ. Econ.

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Starting with his 1970 doctoral dissertation and continuing to today, Robert C. Merton has revolutionized the theory and practice of finance. In 1997, Merton shared a Nobel Prize in Economics “for a new method to determine the value of derivatives.” His contributions to the science of finance, however, go far beyond that. In this article I describe Merton's main contributions. They include the following: 1. The introduction of continuous-time stochastic models (the Ito calculus) to the theory of household consumption and investment decisions. Merton's technique of dynamic hedging in continuous time provided a bridge between the theoretical complete-markets equilibrium model of Kenneth Arrow and the real world of personal financial planning and management. 2. The derivation of the multifactor Intertemporal Capital Asset Pricing Model (ICAPM). The ICAPM generalizes the single-factor CAPM and explains why that model might fail to properly account for observed market excess returns. It also provides a theory to identify potential forward-looking risk premia for use in factor-based investment strategies. It is therefore both a positive and normative theory. 3. The invention of Contingent Claims Analysis (CCA) as a generalization of option pricing theory. CCA applies the technique of dynamic replication to the valuation and risk management of a wide range of corporate and government liabilities. Merton's CCA model for the valuation and analysis of risky debt is known among scholars and practitioners alike as the Merton Model. 4. The development of financial engineering, which employs CCA to design and produce new financial products. Merton was the first to apply CCA to analyze government guaranty programs such as deposit insurance, and to suggest improvements in the way those programs are managed. He and his students have applied his insights at both the micro and macro policy levels. 5. And finally, the development of a theory of financial intermediation that explains and predicts how financial systems differ across countries and change over time. Merton has applied that theory, called functional and structural finance, to guide the design and regulation of financial systems at the levels of the firm, the industry, and the nation. He has also used it to propose reforms in pensions, sovereign wealth funds, and macrostabilization policy. This article is one of a pair of articles published in this volume about Robert C. Merton's contributions to the science of financial economics. This article was originally published in Volume 11 of the Annual Review of Financial Economics. The other article in this pair is “ Robert C. Merton: The First Financial Engineer ” by Andrew W. Lo.

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Section: Financial Economics Textbookmentioning

confidence: 99%

Robert C. Merton and the Science of Finance

Bodie

2020

Annu. Rev. Financ. Econ.

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“…The article describes how retirement savings plans and career change decision making can be facilitated through the use of dynamic strategies utilizing CCA. The effect of changing careers on human capital is analyzed in the light of risk assessment models (Bodie et al 2008).…”

Section: Financial Dimensionmentioning

confidence: 99%

Security and Sustainable Development: Approaches and Dimensions in the Globalization Context

Lankauskienė¹,

Tvaronavičienė²

2012

JSSI

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Security and sustainability conception analysis is being provided in the paper. The conceptions of security and sustainability have been selected due to their significance for contemporary globalized world's issues. Initially, the perceptions encompassing even ancient times are being elaborated. Onward, with an intention to get a more sophisticated view of above mentioned expressions, relevant scientific literature has been critically reviewed accentuating to the dimensions of those two phenomena. The following common dimensions could be proposed: social, economic, environmental. The implication could be stated -security conception provides not only those three dimensions some other important dimensions could be distinguished as well. One more important finding composes the perception of dimensions interactions to analyzed conceptions. Some important implications are being provided in the paper, which elevate the significance of security to sustainability for today's globalized society -security can be proposed as expression with ponderable value, while sustainability gains this power only with "sustainable development" phenomenon.

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“…As the purpose of investing for retirement is not to get rich, but to reach a standard of living at retirement, this is an appropriate strategy which is in line with the science of finance. Bodie, Ruffino and Treussard (2008) describe a mass customization process for the design and production of pension contracts based on Contingent Claims Analysis. Within such a mandatory arrangement with meaningful individual choice, there would not be much need for a third layer, as employees can already choose their optimal solution within the mandatory plan.…”

Section: Given the Behavioral Evidence What We Know About Employee Pmentioning

confidence: 99%

Rational Pensions for Irrational People: Behavioral Science Lessons for the Netherlands

Bodie

Prast²

2011

SSRN Journal

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This paper examines some of the main behavioral patterns that determine personal saving, investment, and retirement decisions, and considers ways to move them in a socially desirable direction. We pay special attention to factors contributing to people making choices that are not in line with their preferences. We present empirical evidence from other countries and consider their implications for proposed changes to the system in the Netherlands.The paper makes various suggestions for improvement regarding both the institutional design and product design for pension saving in the Netherlands that could be adopted in the context of recent proposals for a structural change of the pension system. In doing so it pays attention to both occupational pensions ("the second layer") and pensions for the self employed. A comparison is made with the recommendations of the Goudswaard Committee.

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Contingent Claims Analysis and Life-Cycle Finance

Cited by 6 publications

References 10 publications

Robert C. Merton and the Science of Finance

Robert C. Merton and the Science of Finance

Security and Sustainable Development: Approaches and Dimensions in the Globalization Context

Rational Pensions for Irrational People: Behavioral Science Lessons for the Netherlands

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