Nobel laureates discuss financial innovation

Financial market leaders and researchers gathered this past fall for the first-ever Conference on Financial Innovation hosted by the Owen School. The forum focused on such timely topics as volatility, real estate, credit and stock index option markets, as well as real options and share-based compensation contracts. It also assessed the evolution of financial innovation over the past 35 years and explored what might lie ahead.

The conference, which took place Oct. 16–17, commemorated the 35th anniversary of the publication of two landmark financial studies: “The Pricing of Options and Corporate Liabilities” by Fischer Black and Myron Scholes, and “The Theory of Rational Option Pricing” by Robert C. Merton. Originally published in 1973 when options were considered specialized and economically insignificant financial instruments, these two seminal works had an unprecedented influence and came to underlie almost every facet of the theory and practice of modern-day finance. In 1997 Black, Scholes and Merton were awarded the Alfred Nobel Memorial Prize in Economics for their work. Today they are credited with sparking the growth of derivatives markets, whose value now exceeds $600 trillion.

“More than three decades later, we are reminded of the critical relevancy of these pioneering works and how far the ripples of innovation can spread and influence future events,” says Robert E. Whaley, Valere Blair Potter Professor of Management and Co-director of the Financial Markets Research Center at the Owen School.

Participating in the conference were finance and economics faculty from more than 40 universities worldwide, including the University of Chicago; the University of California, Los Angeles; New York University; Harvard University; the University of California, Berkeley; Columbia University; and Vanderbilt. Offering the event’s keynote address was CME Group Chairman Emeritus Leo Melamed, who is widely recognized as the founder of the financial futures markets. In addition, Scholes, Merton and Melamed participated in a special panel that focused on the direction of financial innovation in the next decade.

“Given the unprecedented financial market volatility and its links to derivative instruments, this new forum and its focus on the derivatives markets couldn’t be more timely,” Whaley says. “The collective insights of academics and practitioners will prove invaluable as we seek to better understand the past, present and future of financial innovation and its impact on the global financial marketplace.”

The 2008 Conference on Financial Innovation was sponsored by the Chicago Board Options Exchange, CME Group, Options Industry Council, Susquehanna International Group LLC, and the Vanderbilt University Law School, which provided facilities for the event. Susquehanna’s participation was prompted by Owen alumnus Eric Noll, MBA’90, who serves as the company’s Director of Research.