Stephen A. Ross (1944-2017) was a financial economist who developed the Arbitrage Pricing Theory (APT), one of the two foundational theoretical frameworks in asset pricing alongside the CAPM.
Key contributions
- APT (1976): showed that no-arbitrage conditions in a multi-factor return-generating process imply an approximate linear pricing relation, without requiring CAPM’s assumptions about utility functions or market portfolio efficiency
- Risk-neutral pricing: co-developed (with Cox) the binomial options pricing model and contributed to the theory of risk-neutral valuation
- Agency theory: contributed to the economic theory of agency (Ross 1973)
Affiliations
- University of Pennsylvania (Wharton School), early career
- Yale School of Management
- MIT Sloan School of Management (Franco Modigliani Professor of Finance)
Legacy for factor investing
The APT provides the theoretical foundation for all multi-factor models in the wiki: fama-french-three-factor, fama-french-five-factor, q-factor-model, and commercial models like msci-barra-gem and mac3-global-equity-risk-model. While the CAPM derives a single-factor model from equilibrium, the APT’s no-arbitrage derivation justifies using multiple factors without specifying their economic content, leaving that to empirical investigation.