John Carrington Cox
American economist (born 1943)
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John Carrington Cox (born 1943) is an American financial economist. He is the Nomura Professor of Finance Emeritus at the MIT Sloan School of Management.[1] He developed the binomial options pricing model with Stephen Ross and Mark Rubinstein.[2] He co-developed the Cox–Ingersoll–Ross model for interest rate dynamics with Jonathan Ingersoll and Ross.[3]
University of Pennsylvania (PhD)
John Carrington Cox | |
|---|---|
| Born | 1943 (age 82–83) Houston, Texas, U.S. |
| Academic background | |
| Education | Louisiana State University (BA) University of Pennsylvania (PhD) |
| Academic work | |
| Discipline | Financial economics |
School or tradition | Neoclassical economics |
Notable ideas | Binomial options pricing model Cox–Ingersoll–Ross model Risk-neutral pricing |
Early life and education
Cox received a Bachelor of Arts in economics from Louisiana State University.[1] He completed his Doctor of Philosophy in finance and applied economics at the University of Pennsylvania.[1]
Academic career
Cox joined the faculty of the Stanford Graduate School of Business in 1975.[4] At Stanford, he collaborated with Stephen Ross to value corporate securities and financial derivatives.[5]
Cox transferred to the MIT Sloan School of Management. He was appointed the Nomura Professor of Finance.[1] He retired from MIT and assumed emeritus status.[1]
Research
Cox's research centers on continuous-time finance and dynamic portfolio choice.[6][1]
Option valuation
Cox and Stephen Ross published "The Valuation of Options for Alternative Stochastic Processes" in 1976.[5] The paper introduced the principle of risk-neutral pricing.[1] This framework proves derivative prices can be computed by adjusting probabilities so expected returns on assets equal the risk-free interest rate.[5] Subsequent derivatives-pricing research built on this risk-neutral approach.[6]
In 1979, Cox, Ross, and Mark Rubinstein published "Option Pricing: A Simplified Approach".[2] The paper detailed the discrete-time binomial option pricing model. The model calculates option values through a step-by-step binomial tree. This mathematical structure allows for the pricing of American options, which can be exercised before expiration.[6]
Cox worked with Fischer Black to apply option valuation to corporate securities. They published the Black-Cox model in 1976 to value corporate bonds featuring safety covenants and subordination arrangements.[7]
Forward and futures pricing
Cox, Jonathan Ingersoll, and Stephen Ross also studied the relationship between forward and futures prices. In a 1981 paper, they showed that the two contracts, despite their similar economic functions, need not have identical equilibrium prices and developed a series of propositions characterizing their relationship. The analysis produced testable implications for differences between forward and futures prices and related both prices to the values of underlying assets.[8]
Term structure of interest rates
Cox, Jonathan Ingersoll, and Stephen Ross published a general equilibrium model of asset prices in 1985.[9] A companion paper applied the framework to model the term structure of interest rates.[3] The resulting Cox-Ingersoll-Ross (CIR) model calculates interest rate dynamics using a mean-reverting state variable.
Portfolio policies
Cox and Chi-fu Huang published a method to calculate optimal consumption and portfolio policies in 1989.[10] This work addresses how an investor's optimal asset allocation should evolve over time to meet long-term financial goals.[1] His work examines how the length of the planning horizon affects optimal behavior.[6]
Awards and recognition
The International Association for Quantitative Finance named him Financial Engineer of the Year in 1998.[6] He is a Fellow of the American Finance Association[11] and of the Econometric Society.[6]
Selected publications
- Cox, John C.; Ross, Stephen A. (1976). "The Valuation of Options for Alternative Stochastic Processes". Journal of Financial Economics. 3 (1–2): 145–166. doi:10.1016/0304-405X(76)90023-4.
- Black, Fischer; Cox, John C. (1976). "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions". Journal of Finance. 31 (2): 351–367. doi:10.1111/j.1540-6261.1976.tb01891.x.
- Cox, John C.; Ross, Stephen A.; Rubinstein, Mark (1979). "Option Pricing: A Simplified Approach". Journal of Financial Economics. 7 (3): 229–263. doi:10.1016/0304-405X(79)90015-1.
- Cox, John C.; Ingersoll, Jonathan E.; Ross, Stephen A. (1981). "The Relation Between Forward Prices and Futures Prices". Journal of Financial Economics. 9 (4): 321–346. doi:10.1016/0304-405X(81)90002-7.
- Cox, John C.; Ingersoll, Jonathan E.; Ross, Stephen A. (1985). "An Intertemporal General Equilibrium Model of Asset Prices". Econometrica. 53 (2): 363–384. doi:10.2307/1911241.
- Cox, John C.; Ingersoll, Jonathan E.; Ross, Stephen A. (1985). "A Theory of the Term Structure of Interest Rates". Econometrica. 53 (2): 385–407. doi:10.2307/1911242.
- Cox, John C.; Rubinstein, Mark (1985). Options Markets. Englewood Cliffs, NJ: Prentice Hall. ISBN 978-0136382058.
- Cox, John C.; Huang, Chi-fu (1989). "Optimal Consumption and Portfolio Policies when Asset Prices Follow a Diffusion Process". Journal of Economic Theory. 49 (1): 33–83. doi:10.1016/0022-0531(89)90067-7.