Beyond Theory

By Rob Simbeck

Bob Whaley gets excited about the place where research and the marketplace collide. In fact, it’s an intersection that goes to the heart of his professional life.

“I don’t believe in theory for theory’s sake,” says the Valere Blair Potter Professor of Finance at the Vanderbilt Owen Graduate School of Management. “I want to take the idea somewhere. If somebody gives me a mathematical model and there is no data for me to test its predictive power or no practical application for which I can use it, I lose interest.”

It’s a quest that led Whaley in 1992 to develop one of the most talked-about indices in modern financial history: the Market Volatility Index, or VIX, a measure of investor jitters that quickly came to be known as the Fear Index. And most recently, he and Owen colleague Associate Professor Jacob Sagi developed Alpha Indices, which help traders isolate the performance of individual stocks or commodities against broader exchange-traded funds, giving them an important new investment tool.

In between, Whaley has earned international recognition in the world of finance on both the academic and market sides of the equation. Known as a foremost expert in derivative contract valuation and risk management, and for his knowledge of market microstructure and volatility, he has written eight books and scores of articles. His research includes widely regarded work with Owen colleague Professor Hans Stoll about the triple witching hour and work on expiration-day effects on, and market manipulations of, index futures and options. Concurrently, he helped bring Duke University’s Fuqua School of Business into the front ranks of business schools before returning in 2006 to Owen, where he had begun his teaching career 28 years earlier.

The VIX—a weighted blend of options prices developed for the Chicago Board Options Exchange to gauge the market’s anticipation of short-term stock volatility—quickly became one of the most closely watched indices in times of economic turmoil. Whaley became a sought-after commentator in the financial and general press, especially when the index spiked, as it did in 2008, reaching near-panic levels during the run-up to that year’s presidential election.

“It’s been pleasing to see the VIX as a standard for investor anxiety,” says Whaley, “but it didn’t take that additional step, which was product creation, until much later. It was a little disappointing that the futures contracts on the VIX Index didn’t get launched until 2004 and the options in 2006.”

On the other hand, the Alpha Indices, designed for the NASDAQ OMX Group to help protect investors against market fluctuations that can erase relative performance gains, came much more quickly to the marketplace.

“We presented the final version of our framework in July 2010 and then went through the regulatory process, got SEC approval, and got the Options Clearing Corp. to change its rules describing how these things clear and what risk disclosure documents there should be,” says Whaley. “The instruments began to trade in April 2011—less than a year since product inception. All my research in some way is applied, and it’s just nice to see an idea used in the marketplace in such an unusually compressed time frame.”

In fact, the initial group of indices is already being supplemented.

“The first seven track stocks vs. the market,” says Whaley, “so you’re trying to isolate individual stock outperformance. The next ones, which are going through regulatory approval now, will isolate commodity outperformance such as gold vs. the stock market.”

They are, adds Sagi, “the kind of thing that demonstrates how you can take research-based knowledge and apply it in a way that helps people and brings value to the market.”

That approach began to take shape for Whaley during his undergraduate days at the University of Alberta in Edmonton, where he grew up. He began in computer science, taking finance courses that would allow him practical problems to work on. Eventually, he says, “it was almost exclusively finance.”

Dwight Grant, then a University of Alberta professor and now with Pricewaterhouse-Coopers in San Francisco, says, “I met Bob when he took an introductory finance class. I asked a very difficult question—it required a synthesis of algebra, geometry and economics—and Bob was the only person in the class who saw what the answer was, and he saw it quickly. It was a flash of insight and an indication of the quickness that he has demonstrated over and over throughout a very distinguished career.

“Then, during his senior year, Bob did a research project and we co-authored a paper in the Journal of Business, which is pretty unusual for an undergraduate to do. I’ve often joked that at the time I thought I was being very gracious and virtuous for including Bob’s name on the article and guiding him through the process, but that anybody examining our careers would have to conclude that he was a very gracious undergraduate to include and carry me through that article.”

Whaley earned an MBA and Ph.D. at the University of Toronto and felt professors “pushing” him toward the United States.

“I was interested in a strong research institution,” he says, “and that’s when I came to Vanderbilt in 1978.” He followed a short Vanderbilt teaching stint with a year in Chicago as vice president of research for a futures brokerage firm, putting his passion for derivatives to work in industry until the desire for autonomy drew him back to academia and the University of Alberta. The weather there convinced his wife, Sondra, a Tennessee native, to steer them southward again.

“Everything was going fine until the end of September, when it snowed 12 inches or something,” he says. “It quickly disappeared, but then in the second week of October, it snowed 27 inches. She looked out, and there was a wall of snow halfway up the door.”

That December, while he was at a conference in Germany, Sondra answered a call from the dean of the business school at the University of Chicago asking if Whaley would be interested in a visiting appointment.

“‘Yes, he would,’ she told them,” he says with a laugh. “She had the deal lined up before I got home. Of course, the University of Chicago was the best finance school in the world.” While he was at Chicago, a number of schools tried to lure him, and the desire for warmer weather led them to Duke.

“Duke had gutted its finance area and wanted someone to rebuild it, so I wound up taking over the finance area,” he says. “During the next 20 years we built what is widely regarded as one of the top 10 finance programs in the country.” In fact, the top-tier Journal of Finance now boasts two editors and three associate editors recruited by Duke under Whaley’s leadership.

When the Owen School inquired about the possibility of Whaley’s return, he says, “I took a tremendous liking to [former chancellor] Gordon Gee and [current chancellor] Nick Zeppos. I knew what I could do in finance and wanted to see if it was possible to do that sort of strengthening more broadly.”

In 2006, Whaley returned to Owen, where in addition to his professorship he serves as co-director of the Financial Markets Research Center. Two years later the economic downturn cut into Vanderbilt’s endowment, as it did at institutions across the country, affecting the Owen School’s ability to recruit and prompting the discontinuation of its Ph.D. program. Still, Whaley is upbeat about the “pockets of excellence” throughout Owen. He is particularly drawn to colleagues who are strong as researchers and teachers, those who have demonstrated a personal commitment to the institution.

And he has equally impressed colleagues.

“Once he has the idea,” says Stoll of their joint work, “he’s relentless in working it through. He has a tremendous work ethic. He’s also turned into a terrific writer, so you couldn’t ask for a better colleague.”

Whaley remains excited by the dynamics of the academy.

“If you were to take a job in industry,” he says, “you would be channeled in one direction or another and someone would be setting your tasks for you. In academia, you set your own agenda and explore the ideas you want to explore. The test is convincing other academics as well as journal editors of the importance of those ideas.”

Just as he balances research, teaching and business, Whaley is happy for those moments when he can mix family and career. One recent opportunity came when he and Sagi were invited to New York with their families to ring the opening bell at NASDAQ. Two of his three children were able to attend, and one was watching on TV.

“Ringing the bell was exciting,” he says, “but having my wife and family there made it that much better. I was just proud of my children being proud of their dad. It’s a priceless memory.”