Arbitrage Pricing Theory 50 Years After Black Merton Scholes

Vol. 22, No. 4, 2024
Robert A. Jarrow

In the past 50 years, the Black Merton Scholes option pricing methodology has advanced in three directions: the mathematical foundations, modifying its assumptions, and applications to new derivatives. This lecture reviews the advances with respect to the mathematical foundations and the modifications of its assumptions. The key insight of this review is that the BMS methodology is very robust to modifying all of its assumptions, except for a relaxation of competitive markets.