Cornell University The Johnson School at Cornell University

2008 Headlines

Jarrow's Work in Derivatives Published

The Johnson School's Jarrow compiles his work in derivatives and credit-risk modeling, even as mortgage-backed derivatives take center stage

October 13, 2008 | Ithaca, NY | The Johnson School at Cornell University and World Scientific Publishing Co. announce the publication of the new book "Financial Derivatives Pricing: Selected Works of Robert Jarrow." The book is a collection of original papers that contributed to significant advances in financial economics, written by Robert A. Jarrow, the Ronald P. and Susan E. Lynch Professor of Investment Management and professor of finance and economics at the Johnson School.

Jarrow is one of the co-inventors of the Heath-Jarrow-Morton framework for valuing interest rate derivatives, and is widely recognized for his breakthrough ideas in quantitative finance. His teaching and research interests involve the study of mathematical finance, and its application to derivatives, risk management, investments, and asset pricing theory. He currently is conducting research on economic bubbles, and whether bubbles can exist—and thus be identified—in the risk-management models being used today.

The new book is divided into three sections:

Jarrow is among the founders of the academic field of financial engineering, a sub-discipline of mathematics and finance that has received attention in recent weeks, during the U.S. financial markets crisis. Professor Jarrow is in a unique position to identify the root causes of the sub-prime mortgage crisis, and he did so at a panel on the crisis, held on the Cornell campus in September.

Sub-prime mortgaged backed bonds are highly complex derivatives, Jarrow said, a far cry from plain-vanilla bonds. These securities employed a complicated waterfall structure of interest payments, starting at the top, and defaults, starting at the bottom. "These securities are going to be hard to model and hard to understand," Jarrow said. In short, credit-risk models could not keep up with the pace at which sub-prime mortgage-backed securities were being created and deployed in the markets, he said.