Robert Cox Merton is an American economist who won the 1997 Nobel Memorial Prize in Economic Sciences. Merton, along with Fisher Black and Myron Scholes is known for his pioneering contributions to continuous-time finance, especially the first continuous-time option pricing model, the Black–Scholes–Merton model.
Merton was born to father Robert K. Merton who was a member of the American Philosophical Society, the American Academy of Arts and Sciences and is also considered a founding father of modern sociology and a major contributor to criminology. He was born in 1944, New York City and grew up in Westchester County, New York. He has a Masters in Science from the California Institute of Technology, and a doctorate in economics from Massachusetts Institute of Technology (MIT), where he studied under the guidance of Paul Anthony Samuelson, the first American to win the Nobel Memorial Prize in Economic Sciences in 1970.
Merton’s research focuses on finance theory including lifecycle finance, optimal intertemporal portfolio selection, capital asset pricing, pricing of options, risky corporate debt, loan guarantees, and other complex derivative securities. In 1994, he along with Scholes and John W. Meriwether as key people founded LTCM (Long Term Capital Management), a hedge fund management firm but it collapsed in 1998 and lost $4.6 billion in less than four months following the 1997 Asian financial crisis and 1998 Russian financial crisis. His model still remains prevalent and influential. The BSM model is regarded as one of the best ways of determining the fair price of options. The model requires 5 variable inputs and also assumes that stock prices follow a log-normal distribution because asset prices cannot be negative. It is widely used today by investment bankers and hedge funds as the basis for hedging strategies.
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Beyond Assumptions 