Publication: Journal of Economic Education
Volume: Volume 22, No. 2
Issue: Spring 1991
Pages: pp. 165-171
Author(s): Edward J. Sullivan and Timothy M. Weithers
Address (Principal Author):
Title: Louis Bachelier: The Father of Modern Option Pricing Theory
Abstract: Prior to the publication of the Black-Scholes model in 1973, the quest for a valuation formula that would describe option prices reflected one of the most elusive goals in financial economics. Though much work was done in the 1960s, many of the insights and techniques used to solve the problem were presented or anticipated at the beginning of the twentieth century by Louis Bachelier. The purpose of this paper is to document the seminal contributions made by this obscure French mathematician. These innovations include the first graphical representation of option pricing, a mathematical description of stock prices utilizing Brownian motion and anticipating the efficient market hypothesis, and the first formal option pricing formula.