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.
ISBN: | 9781108486361 |
Publication date: | 19th September 2019 |
Author: | David M. (Stanford University, California) Kreps |
Publisher: | Cambridge University Press |
Format: | Hardback |
Pagination: | 214 pages |
Series: | Econometric Society Monographs |
Genres: |
Econometrics and economic statistics Finance and accounting |