In Memoriam

(1944 - 2017)

Stephen A. Ross died on Friday, March 3, 2017, in Old Lyme, Connecticut, about a 40-minute drive from New Haven. He had just turned 73. His passing was reported by Caltech, where he had studied physics and counted the 1965 Nobel laureate Richard Feynman among his teachers; MIT, where he was a professor; Yale, where he had previously taught; the American Finance Association, which he had served as president in 1988; The New York Times; the Financial Times; the Wall Street Journal; the New Haven Register.
“Steve” was one of the fathers of modern financial theory: “Supply, demand, and equilibrium are the catchwords of economics, but finance, or, if one is being fancy, financial economics, has its own distinct vocabulary.” This is how he put it in Neoclassical Finance (Princeton University Press, 2005, p. 1), a book based on the lectures he gave at Princeton in the spring of 2001.
Steve Ross visited LUISS on several occasions. On January 15, 2003, in the Aula Magna on Viale Pola, he gave a lecture entitled Forensic Finance: ENRON and Others as part of the fourth edition of the “Angelo Costa” Award, an initiative of Gustavo Piga, editor-in-chief of the Rivista di Politica Economica.
After serving as Professor of Economics and Finance first at Wharton and then at Yale, he moved to MIT, where in 1997 he was appointed Franco Modigliani Professor of Financial Economics, a chair named in honor of the 1985 Nobel laureate. His students included Ignazio Visco at Wharton - Governor of the Bank of Italy - and  Massimo Massa at Yale, formerly at LUISS and Rothschild Professor of Banking at INSEAD. He also had very flattering words for another academic formerly at LUISS, Domenico Cuoco, Professor of Finance at Wharton: “He is first class.”.
The list of his students is a long one, filled with distinguished names. In his honor, McGraw-Hill published Stephen A. Ross, Mentor – Influence Through Generations, edited by Mark Grinblatt. An excerpt from Thomas Copeland’s tribute, reproduced below, reveals the playful side of Ross’s personality.
Steve Ross served as president of the American Finance Association in 1988. He is widely known for The Economic Theory of Agency: The Principal’s Problem, on the principal-agent problem (AER, 1973) - an article at the intersection of economics and finance that preceded Jensen and Meckling’s contribution (JFE, 1976) - and for The Arbitrage Theory of Capital Asset Pricing (JET 1976)
He also co-authored many important papers with John Cox, whose PhD dissertation he supervised, Jonathan Ingersoll, and Mark Rubinstein. These include The Valuation of Options for Alternative Stochastic Processes (Cox-Ross, JFE 1976), which sets out the principle of risk-neutral valuation; Option Pricing: A Simplified Approach (Cox-Ross-Rubinstein, JFE 1979), which presents a binomial-tree approach to derivative valuation; and A Theory of the Term Structure of Interest Rates (Cox-Ingersoll-Ross, Econometrica 1985), the first term-structure model to rule out the possibility of negative interest rates on cash loans in the absence of “frictions” - specifically, storage costs.
Among his many other works are An Analysis of Variable Rate Loan Contracts (Cox-Ingersoll-Ross, JF 1980), a seminal contribution to the valuation of floating-rate securities, and Tobin’s q Ratio and Industrial Organization (Lindenberg-Ross, JB 1981), on Tobin's q and the role of intangible assets in company valuation. One of his final contributions was The Recovery Theorem (JF 2015), in which he separates probability distributions from risk aversion.
Ross turned from economics to finance after attending a seminar by Richard Roll of UCLA, , with whom he later founded Roll & Ross Asset Management. In 2009, Roll himself interviewed Ross on behalf of the American Finance Association. The interview with Stephen A. Ross is available on YouTube and forms part of the “Masters of Finance” series, which also features Paul A. Samuelson (Nobel Prize, 1970), Ken Arrow (Nobel Prize, 1972), Robert Engle (Nobel Prize, 2003), Eugene Fama (Nobel Prize, 2013), Michael Jensen, Harry M. Markowitz (Nobel Prize, 1990), Robert C. Merton (Nobel Prize, 1997), Maureen O’Hara, Richard Roll, Myron Scholes (Nobel Prize, 1997), William F. Sharpe (Nobel Prize, 1990), Jack Treynor, Fred Weston.
Steve Ross’s death leaves a profound void in finance. There is also the lingering regret that he did not receive the Nobel Prize he deserved and would surely have been awarded.
Emilio Barone
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Thomas Copeland (Stephen A. Ross, Mentor – Influence Through Generations, p. 21):
“… Years later, I visited Steve at his office in New Haven and we went to the best French restaurant in town for lunch. After a great meal and extraordinary bottle of wine, the waiter handed the check to Steve. Even he seemed surprised at the total. With a gleam in his eye he turned to me and said he would make a bet. If I could answer an economics question correctly, he would pay for lunch, but if I failed I would pay. He cautioned me that under similar circumstances Ken Arrow had paid last week. Having no deficit of hubris and feeling the effect of the wine, I agreed to the wager. Once again Steve cautioned me—”Remember,” he said, “this is a bet and not an option!” Then he asked his question. “Suppose you are offered ownership of a Black box that guarantees to return $1.05 to you exactly one year after you put $1.00 into it—and you may do so at any time for up to a year. Alternatively, you can put your $1.00 into a bank today and receive $1.10 at the end of the year with absolute certainty. How much would you pay for the Black box?” I thought about it and answered, “I know about opportunity cost and given the bank offer with certainty the box is worth nothing.” I also paid for lunch, because as Steve articulated, I had assumed that market rates of interest would stay at 10 percent throughout the year, but if there was any chance at all that they would fall to less than 5 percent, then the Black box was an option on interest rates and worth a positive amount. …”

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His final article:
Ross, Stephen Alan, “Factors—Theory, Statistics, and Practice”, Journal of Portfolio Management, Special Issue 2017, Vol. 43, No. 5: pp. 1-5. (pdf)

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In Memoriam – Battell Chapel – Yale University – May 6th, 2017 (pdf)

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Stephen Foerster, “In Memory of Stephen A. Ross”, Journal Of Investment Management, Vol. 15, No. 2, 2017 (pdf)