Robert C. Merton Defends Quantitative Risk Analysis

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Nobel Laureate Robert C. Merton, School of Management Distinguished Professor of Finance at MIT Sloan School of Management

In the eurozone’s chaotic investment environment, where news stories revive ailing markets or send them into a new tailspin on a daily basis, portfolio managers and other financial professionals hope that tracking macroeconomic risks will protect them from serious losses — even as quantitative analysis, a risk analysis tool that many would have relied on before the Global Financial Crisis, has fallen under a cloud of suspicion.

However, Nobel Laureate Robert C. Merton feels that quantitative risk analysis will be very much a part of the future of finance. In an interview with Risk (subscription required), Merton said he is “really optimistic” for the future of quantitative analysts, explaining that “The industry is more technical than ever, and there is as much need to understand the risks in the system as ever. This means you need technically minded people.”

Merton is School of Management Distinguished Professor of Finance at MIT Sloan School of Management and recipient of the Nobel Prize in Economic Sciences. He has done an extensive amount of work with quantitative risk analysis, and his model for applying contingent claims analysis to the valuation of corporate debt obligations has been adapted to measure sovereign risk and identify trading opportunities for sovereign debt. He has also received the Nicholas Molodovsky Award from CFA Institute.

Merton co-founded Long-Term Capital Management, a hedge fund that relied on quantitative analysis. While it enjoyed initial success, it ultimately required intervention from the U.S. Federal Reserve Bank. It was an experience that Merton later described as ‘more than humbling’ in an interview with PBS.

Merton continues to develop quantitative risk analysis models in his role as resident scientist at Dimensional Fund Advisors — where he works alongside Professor Eugene F. Fama of the University of Chicago Booth School of Business, who spoke at the 65th CFA Institute Annual Conference in Chicago. In a recent interview with Bloomberg Businessweek, Merton used some unexpected props to explain how the promise of taxpayer bailouts continues to save money for large financial firms.

At the Fifth Annual CFA Institute European Investment Conference in Prague, Merton will deliver the closing keynote address, “Practical Tools for Analyzing and Managing Macrofinancial Risks in Investment Portfolios.” You can register to attend the conference and hear Merton in person, and follow this blog for more speaker updates as the event draws closer.

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