HOW CLOSE ARE THE OPTION PRICING FORMULAS OF BACHELIER AND BLACK–MERTON–SCHOLES?

By Walter Schachermayer, Josef Teichmann. 2007

99 citations recorded by the source corpus.

We compare the option pricing formulas of Louis Bachelier and Black–Merton–Scholes and observe—theoretically as well as for Bachelier's original data—that the prices coincide very well. We illustrate Louis Bachelier's efforts to obtain applicable formulas for option pricing in pre‐computer time. Furthermore we explain—by simple methods from chaos expansion—why Bachelier's model yields good short‐time approximations of prices and volatilities.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/f2ea335cee7dd125174161ba15d82415b97832fc

Citations in the corpus

• OPTION PRICING AND HEDGING WITH EXECUTION COSTS AND MARKET IMPACT (2013, unknown): “onsider a CARA utility function which is, a priori, incompatible with a geometric Brownian motion. The prices we obtain are therefore subject to criticisms when the option maturity is long (see e.g., [27] for a comparison between the Bachelier and the Black-Scholes option pricing models). Cash accou”