Thursday, April 13, 2017

Stephen Ross of Arbitrage Pricing Theory (APT) fame died last month

Stephen Ross, the originator of the Arbitrage Pricing Theory (APT), died last month. He was a top finance scholar and the initial leader on factor investing. He was also one of the developers of the binomial pricing model for options and he was a co-author of a leading model on the term structure of interest rates. His work has been advanced by many others since his original research in the late '70's, but he provided the key foundations for a significant amount of finance that is used today. This does not even include his work on agency theory. 

Interestingly, it has taken a long time for much of this work to truly become mainstream. Factor beta is now the rage of finance for new fund development. His work on agency theory has influenced much of corporate finance thinking. His work on option theory provided a strong alternative foundation to Black-Scholes on how to price options, and his term structure work is a mainstay of any fixed income quant research group. Outside of the agency work, you can think of Prof Ross as Dr. Arbitrage. He was able to push the limits on the basic idea that returns can be decomposed and priced through reconstituting the parts or through some basic components. He truly showed the influence of arbitrage as the core concept of pricing assets and finance.

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