Option Pricing Model: Comparing Louis Bachelier with Black-Scholes Merton

45 Pages Posted: 22 May 2016

Date Written: March 30, 2016

Abstract

The paper reviews the option pricing model constructs of Bachelier and Black-Scholes Merton, concluding the latter model approximates the former. The paper demonstrates that certain critiques of the Bachelier model outlined in the 1960s and 1970s are not sound; and Bachelier’s model can be readily adapted to the modern markets, contracts and price path assumptions. Further the modern price path assumptions are analysed showing the log-normal distribution is poorly justified, and the risk free hedge justification is weak in a dynamic time setting. This resolves in the discount rate being the underlying risky asset return with a normal dispersal.

Keywords: Bachelier, Black-Scholes, Merton, Option Pricing

JEL Classification: G13

Suggested Citation

Thomson, Ian, Option Pricing Model: Comparing Louis Bachelier with Black-Scholes Merton (March 30, 2016). Available at SSRN: https://ssrn.com/abstract=2782719 or http://dx.doi.org/10.2139/ssrn.2782719

Ian Thomson (Contact Author)

University of St Joseph ( email )

NAPE, Lote 18
Rua de Londres - P Edf. Tak Ip Plaza, R/C - 3
Macao
Macau

HOME PAGE: http://www.usj.edu.mo/en/

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