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The Contributions of Professors Fischer Black, Robert Merton and Myron Scholes to the Financial Services Industry
Author(s) -
Marsh Terry,
Kobayashi Takao
Publication year - 2000
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/1468-2443.00020
Subject(s) - black–scholes model , mathematical finance , valuation of options , economics , financial economics , binomial options pricing model , stochastic volatility , jump diffusion , mathematical economics , volatility (finance) , jump , physics , quantum mechanics
This paper is written as a tribute to Professors Robert Merton and Myron Scholes, winners of the 1997 Nobel Prize in economics, as well as to their collaborator, the late Professor Fischer Black. We first provide a brief and very selective review of their seminal work in contingent claims pricing. We then provide an overview of some of the recent research on stock price dynamics as it relates to contingent claim pricing. The continuing intensity of this research, some 25 years after the publication of the original Black–Scholes paper, must surely be regarded as the ultimate tribute to their work. We discuss jump‐diffusion and stochastic volatility models, subordinated models, fractal models and generalized binomial tree models for stock price dynamics and option pricing. We also address questions as to whether derivatives trading poses a systemic risk in the context of models in which stock price movements are endogenized, and give our views on the ‘LTCM crisis’ and liquidity risk.