ENGLISH

The Black-Scholes-Merton Model as an Idealization of Discrete-Time Economies

By David M. Kreps

Book information

Publisher
Cambridge University Press
Year
2019
ISBN
1108486363, 9781108486361
Language
english
Format
PDF
Filesize
1 MB (1448849 bytes)
Series
Econometric Society Monograph
Pages
xii+204\217
Time added
2019-11-10 14:15:05

Description

This book examines whether continuous-time models in frictionless financial economies can be well approximated by discrete-time models. It specifically looks to answer the question: in what sense and to what extent does the famous Black-Scholes-Merton (BSM) continuous-time model of financial markets idealize more realistic discrete-time models of those markets? While it is well known that the BSM model is an idealization of discrete-time economies where the stock price process is driven by a binomial random walk, it is less known that the BSM model idealizes discrete-time economies whose stock price process is driven by more general random walks. Starting with the basic foundations of discrete-time and continuous-time models, David M. Kreps takes the reader through to this important insight with the goal of lowering the entry barrier for many mainstream financial economists, thus bringing less-technical readers to a better understanding of the connections between BSM and nearby discrete-economies.

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