At the Forefront of Capital Markets

Faculty Giants: Mark Rubinstein

By Victoria Chang


Terms like portfolio insurance, exotic options, and the binomial options pricing model may mystify most people, but to Professor Emeritus Mark Rubinstein, they represent an illustrious career breaking new ground in finance.

Rubinstein, who retired earlier this year after nearly 40 years on the Berkeley-Haas faculty, is part of a generation of pioneers who have forever changed how financial assets are created and priced. The group includes such Nobel Laureates as Robert Merton, Myron Scholes, and Bill Sharpe.

Rubinstein is best known for his contributions in options pricing, including the development in 1979 of the Cox-Ross-Rubinstein Model (binomial options pricing model) with John Cox and Stephen Ross, both of MIT. It is the most widely used model to value derivatives by professional traders and no doubt contributed to the subsequent growth of derivatives around the world. Rubinstein also extended and generalized Sharpe’s famous capital asset pricing model (CAPM), which describes the relationship between risk and expected return and is used in pricing risky securities.

Real-World Applications

“Mark has been a pioneer in our understanding of capital markets and how they function,” says Haas colleague Hayne Leland, who retired in 2008. “His most famous work was in simplifying the option pricing model not only to a level that everyone could understand, but also to a point where everyone could use it effectively in the real world.”

In the 1980s, Rubinstein and Leland also developed an institutional trading strategy called “portfolio insurance.” Some argued that portfolio insurance caused the stock market crash of 1987, or “Black Monday,” when the market sank nearly 30 percent in one day.


Rubinstein joined Leland, and Haas Adjunct Finance Professor John O’Brien in starting a company based on portfolio insurance and amassed a large number of clients, including pension fund managers. Portfolio insurance allowed the trio to help their clients gradually sell out of the market as the market fell and to buy in as the market rose. On the sell side, there was a floor on how much a client could lose if the market fell. The theory was that massive selling by portfolio insurers was responsible for most of the 1987 decline.


“I’m removed from it now after 20 years,” says Rubinstein. “But at the time, I was worried that we had created the crash and about a possible depression, or that the crash could destabilize the relationship between Russia and the Soviet Union.”

The market eventually recovered, and the crash may have warded off a real recession by bringing stock prices back down to reality, according to Rubinstein and other economists. Traders today still use strategies that are not called the same thing, but are roughly equivalent to portfolio insurance.

Nor did the experience hinder Rubinstein’s intellectual prowess. Subsequently in the early 1990s,  Rubinstein, Leland, and O’Brien invented Super Shares, the precursor of the exchange traded fund (a mutual fund traded on the stock exchange).

Back to History

Rubinstein is most proud of his 2006 book, A History of the Theory of Investments: My Annotated Bibliography, which Sharpe called a “remarkable and beautiful piece of analytic work.” The book looks at hundreds of academic journal articles to explain the origins of key finance ideas in academia. “I discovered that people who were practicing the academics of finance didn’t understand the history very well and often thought the wrong things,” explains Rubinstein.

Lately, Rubinstein has turned to his first love,  history, which he almost chose as a career. He’s  already written a “100, maybe 200-page” paper on classical Greece and Rome and is currently working on a book on early Christianity titled The New Gospel. He also has four forthcoming religion articles in the journal Free Inquiry.

“I’m not becoming religious,” he quickly adds. “It’s just interesting to understand how Christianity spread.”

The fact that Rubinstein hasn’t stopped probing new subjects comes as no surprise to Leland, his longtime friend and colleague. “Mark’s retirement is a loss to the university, but he will continue to explore intellectual topics,” Leland says. “He is a great man and a remarkable character because of the rigor of thinking he brings to every aspect of his life.”


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