Black Schole Model – an Econophysics Approach

S PRABAKARAN, K RAVICHANDRAN

Abstract


The Black Scholes model of option pricing constitutes the cornerstone of contemporary valuation theory. However, the model presupposes the existence of several unrealistic assumptions including the lognormal distribution of stock market price processes. In the past decade or so, physicists have begun to do academic research in economics. Perhaps people are now actively involved in an emerging field often called Econophysics. Econophysics applies statistical physics methods to economical, financial, and social problems. The main goal of this study is threefold: 1) lists out the derivation of the Black-Scholes formula through the partial differential equation based on the construction of the complete “hedge portfolio”, 2) to provide a brief introduction to the problem of pricing financial derivatives in continuous time; 3) and finally we will show the totality theory  developed in the previous section with a concrete example.


Full Text:

PDF


DOI: https://doi.org/10.5296/erm.v2i1.302

Enterprise Risk Management  ISSN 1937-7916

Copyright © Macrothink Institute   

To make sure that you can receive messages from us, please add the 'macrothink.org' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.