Timeline
- 1975
- Received PhD from the Wharton School at the University of Pennsylvania.
- 1976
- Developed the Cox–Ross–Rubinstein binomial model for options pricing.
- 1985
- Published the Cox–Ingersoll–Ross term-structure model.
- 1998
- Received the IAFE/Infinity Financial Engineer of the Year award.
Life and Career
John Cox is an academic and leading theorist on the pricing of derivatives. He was at the forefront of the revolution in options modeling in the 1970s. He is the Nomura Professor of Finance at the Sloan School of Management at MIT, and has been a consultant for a number of securities firms. He has also served as an adviser to government agencies in several countries.
Key Thinking
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Cox has made a significant contribution to the development of financial engineering technology.
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His work with Stephen Ross explored the foundations of option valuation and established the principle of risk-neutral valuation.
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He is known as one of the developers of the influential Cox–Ross–Rubinstein binomial model for the pricing of options.
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In the mid-1970s, Cox, Stephen Ross of MIT, and Jon Ingersoll of Yale University published a number of papers that led to the Cox–Ingersoll–Ross term-structure model, which provided a consistent approach to the valuation of interest-rate derivatives.
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In a paper co-authored with Fischer Black in 1976, he examined how bond provisions can bring about a firm’s bankruptcy or reorganization, one of the first to deal with default premiums and credit spreads.
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In a 1981 article, Cox argued that forward and futures prices will not necessarily be identical.
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In the late 1980s, Cox solved a long-standing problem in portfolio theory with Chi-fu Huang.
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He has studied the use of option technology to analyze corporate securities and intertemporal portfolio policies.
In Perspective
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The Cox–Ross–Rubinstein model became popular due to its relative simplicity and flexibility in that it uses a “discrete-time” model of the varying price over time of the underlying financial instrument, and can be applied to the pricing of American as well as European options.
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The model was built on earlier work on Poisson models by Cox and Ross, and the Cox–Ingersoll–Ross model for the term structure of interest rates.
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The model allowed a better understanding of how derivative securities are priced, as it is based on the fact that investor risk preferences played no part in the pricing of derivatives––the concept of risk-neutral pricing.
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Although there are now computational alternatives to the Cox–Ross–Rubinstein model, the model is still popular due to its value as a teaching tool.
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Cox has also developed a simple numerical scheme for valuing American options that is used by most firms dealing in equity derivatives.
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For dynamic investment strategies, he has examined how best to manage a portfolio over time to meet specific objectives.
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His later research in asset pricing led to a widely used model of the term structure of interest rates.
Quotation
“Sometimes a little thinking can prevent a lot of misguided math, and sometimes a little math can prevent a lot of misguided thinking.”
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