How close are the option pricing formulas of Bachelier and Black-Merton-Scholes?

Walter Schachermayer and Josef Teichmann

Papers from arXiv.org

Abstract: 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.

Date: 2007-11
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0711.1272

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