Finance, Economics, and Mathematics

Chapter 2Lifetime Achievement Award

By Dwight Cass

Risk, 44-45, January 2002

In the late 1960s, Wells Fargo Bank in San Francisco assembled a team of uniquely gifted thinkers who would go on to push the boundaries of financial theory. Working alongside William Sharpe, Myron Scholes, Fisher Black, and Robert Merton at the time was Oldrich Vasicek, who is Risk's lifetime achievement award recipient. Like his Wells Fargo colleagues, Vasicek has had a profound effect on both financial theory and practice. His equilibrium model of the term structure of interest rates is widely acknowledged as the landmark work in the field, and many credit it for setting off the series of modeling innovations that paved the way for the rapid growth of the interest rate derivatives market. Ten years later, he developed a groundbreaking credit portfolio risk model that paved the way for the approaches incorporated in the Basel II capital Accord.

Among market practitioners, he is perhaps best known for co-founding KMV, the San Francisco credit analysis firm, and for using Scholes, Black, and Merton's insights on option pricing to develop the expected default frequency (EDF) credit pricing system—a so-called Merton model approach—at the heart of KMV's product line. The company has been extremely successful, with KMV claiming more than 70 percent of the world's largest financial institutions as clients. It is hard to find a major credit derivatives dealer or loan house that does not use it. The success ...