NOBEL PRIZES

HOW MUCH DO YOU KNOW ABOUT THE 1990 AND 2011 NOBEL PRIZES IN ECONOMICS FOR WORK IN FINANCE ?

IN 1990 THE NOBEL PRIZE IN ECONOMICS WAS AWARDED TO 3 SCHOLARS :

  1. HARRY MARKOWITZ*
  2. MERTON MILLER***
  3. WILLIAM SHARPE**

FOR SCIENTIFIC CONTRIBUTIONS THAT HAVE HAD A POWERFUL IMPACT ON BOTH THE THEORY AND PRACTICE OF FINANCE.

IN 2011 THE SVERIGES RISKS BANK PRIZE IN ECONOMIC SCIENCES IN MEMORY OF ALFRED NOBEL WAS AWARDED JOINTLY TO :

  1. THOMAS J. SARGENT
  2. CHRISTOPHER A.SIMS

FOR THEIR EMPIRICAL RESEARCH ON CAUSE AND EFFECT IN THE MACROECONOMY.

  • REMINDER
  • * HARRY MARKOWITZ IS THE FATHER OF MODERN PORTFOLIO THEORY, THE SCIENTIFIC STUDY OF HOW TO TRADE OFF RISK AND REWARD IN CHOOSING AMONG RISKY INVESTMENTS. IN THIS SEMINAL ARTICLE, « PORTFOLIO SELECTION », WHICH APPEARED IN the Journal of Finance IN 1952, HE DEVELOPED A MATHEMATICAL MODEL SHOWING HOW INVESTORS COULD ACHIEVE THE LOWEST POSSIBLE RISK FOR ANY GIVEN TARGET OF RETURN. THE BASIC MARKOWITZ MODEL HAS BEEN INCORPORATED INTO BASIC FINANCE THEORY AND IS WIDELY USED BY PRACTICING INVESTMENT MANAGERS.
  • ** WILLIAM SHARPE TOOK MARKOWITZ’S RESULTS AS HIS STARTING POINT AND DEVELOPED THEIR IMPLICATIONS FOR ASSET PRICES. BY ADDING THE ASSUMPTION THAT AT ALL TIMES ASSET PRICES WILL ADUST TO EQUATE DEMAND AND SUPPLY FOR EACH RISKY ASSET, HE SHOWED THAT A VERY SPECIFIC STRUCTURE MUST EXIST AMONG THE EXPECTED RATES OF RETURN ON RISKY ASSETS ( « CAPITAL ASSET PRICES : A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK, » Journal of Finance, 1964 ). THE STRUCTURE SUGGESTED BY SHARPE’S THEORY IS WIDELY USED TODAY AS THE BASIS FOR MAKING RISK ADJUSTMENTS IN MANY AREAS OF FINANCE THEORY AND PRACTICE.
  • *** MERTON MILLER HAS CONTRIBUTED MAINLY TO THE THEORY OF CORPORATE FINANCE. HE AND FRANCO MODIGLIANI ( AN EARLIER RECIPIENT OF THE NOBEL PRIZE IN ECONOMICS) ADDRESSED THE DIVIDEND AND BORROWING POLICIES OF FIRMS IN A SERIES OF ARTICLES STARTING WITH « THE COST OF CAPITAL, CORPORATION FINANCE, AND THE THEORY OF INVESTMENT, » WHICH APPEARED IN THE American Economic Review IN 1958. THEIR FUNDAMENTAL CONTRIBUTION WAS TO FOCUS THE ATTENTION OF THEORISTS AND PRACTITIONERS OF FINANCE ON HOW CORPORATE DIVIDEND AND FINANCING POLICIES AFFECT THE TOTAL VALUE OF THE FIRM.

  • AGAIN IN 1997 THE NOBEL PRIZE IN ECONOMICS WAS AWARDED FO FINANCIAL ECONOMISTS ( ROBERT C. MERTON, MYRON SCHOLES AND FISHER BLACK ) FOR THEIR MATHEMATICAL FORMULA FOR THE PRICING OF OPTIONS AND OTHER DERIVATIVE SECURITIES THAT HAS HAD AN ENORMOUS IMPACT ON BOTH THE THEORY AND PRACTICE OF FINANCE. IT IS KNOWN AS THE BLACK-SCHOLES OPTION PRICING FORMULA.

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