This book examines whether continuous-time models in frictionless
financial economies can be well approximated by discrete-time
models. It specifically looks to answer the question: in what sense
and to what extent does the famous Black-Scholes-Merton (BSM)
continuous-time model of financial markets idealize more realistic
discrete-time models of those markets? While it is well known that
the BSM model is an idealization of discrete-time economies where
the stock price process is driven by a binomial random walk, it is
less known that the BSM model idealizes discrete-time economies
whose stock price process is driven by more general random walks.
Starting with the basic foundations of discrete-time and
continuous-time models, David M. Kreps takes the reader through to
this important insight with the goal of lowering the entry barrier
for many mainstream financial economists, thus bringing
less-technical readers to a better understanding of the connections
between BSM and nearby discrete-economies.
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