The Center for Financial Studies has awarded its Deutsche Bank Prize in Financial Economics to Stephen A. Ross (BS '65), a professor of finance at MIT and member of Caltech's Board of Trustees. The center cited Ross for his groundwork and fundamental contributions to the analytical development of financial economics.
"The work of Stephen A. Ross has shaped today's thinking in financial innovation, practice, and policy," says Jan Pieter Krahnen, the center's director. "For more than 25 years, major models developed by him have marked the economic world. His models relate to the theory of asset pricing, the analysis of the term structure of interest rates, understanding option prices, and the basic structure of the principal-agent problem."
"Steve has completed several of the most important pieces of research in this field," says Richard Roll, the Linde Institute Professor of Finance at Caltech, who has been a close friend and colleague of Ross's since 1973. "There is no one who deserves this honor more."
Ross is perhaps best known for his arbitrage pricing theory and agency theory. The first—considered a cornerstone of modern asset pricing theory—holds that price changes of all assets are driven by a limited number of underlying influences, such as gross domestic product, inflation, and investor confidence. Agency theory applies to situations that involve a principal—for example, an investor or a stockholder—who has employed an agent to make decisions on their behalf. Since the agent might be motivated to make different decisions than the principal would, the theory involves creating incentives that make it more likely that the agent will make decisions that are desirable from the principal's perspective. This theory is particularly appropriate for large corporations where executives often make decisions on behalf of shareholders.
Among his many other contributions to finance and economics, Ross also helped develop techniques for pricing derivatives that are widely used on Wall Street and other financial centers for determining the value of complex financial instruments.
Ross earned his undergraduate degree in physics at Caltech and his doctorate in economics at Harvard University. He has been the Franco Modigliani Professor of Financial Economics at the MIT Sloan School of Management since 1998 and has held faculty positions at Yale University and the Wharton School of the University of Pennsylvania. He was a member of the Social Science Advisory Committee at Caltech in 1986 and has been a member of Caltech's Board of Trustees since 1993.
In addition to his academic positions, Ross has worked as an adviser to various corporations and government departments and served as president of the American Finance Association in 1988. He is widely published, having authored more than 100 articles; he is also an associate editor of several of the field's journals.
Ross has previously been awarded the Morgan Stanley Prize (2014), first prize in the Roger F. Murray Prize Competition (2013), the Onassis Prize for Finance (2012), and the Jean-Jacques Laffont Prize (2007), among others. He is a member of the Econometric Society and a fellow of the American Academy of Arts and Sciences.
The Center for Financial Studies in partnership with Goethe University Frankfurt has awarded the Deutsche Bank Prize biannually since 2005. The selection jury identifies a researcher "whose work has had a marked influence on research dealing with financial economics and macroeconomics, and has led to fundamental advances in economic theory and practice."
Ross will receive the prize on September 24, 2015, as part of an academic symposium.
Written by Kimm Fesenmaier