March 29, 1900, is considered by many to be the day mathematical
finance was born. On that day a French doctoral student, Louis
Bachelier, successfully defended his thesis "Theorie de la
Speculation" at the Sorbonne. The jury, while noting that the topic
was "far away from those usually considered by our candidates,"
appreciated its high degree of originality. This book provides a
new translation, with commentary and background, of Bachelier's
seminal work.
Bachelier's thesis is a remarkable document on two counts. In
mathematical terms Bachelier's achievement was to introduce many of
the concepts of what is now known as stochastic analysis. His
purpose, however, was to give a theory for the valuation of
financial options. He came up with a formula that is both correct
on its own terms and surprisingly close to the Nobel Prize-winning
solution to the option pricing problem by Fischer Black, Myron
Scholes, and Robert Merton in 1973, the first decisive advance
since 1900.
Aside from providing an accurate and accessible translation,
this book traces the twin-track intellectual history of stochastic
analysis and financial economics, starting with Bachelier in 1900
and ending in the 1980s when the theory of option pricing was
substantially complete. The story is a curious one. The economic
side of Bachelier's work was ignored until its rediscovery by
financial economists more than fifty years later. The results were
spectacular: within twenty-five years the whole theory was worked
out, and a multibillion-dollar global industry of option trading
had emerged."
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