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Continuous Time Finance

Continuous Time Finance

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Published by: tir_pat on Sep 10, 2010
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Continuous-Time Finance
Robert C. Merton
Revised Edition
A great economist of an earlier generation said that, useful though economic theoryis for understanding the world, no one would go to an economic theorist for advice onhow to run a brewery or produce a mousetrap. Today that sage would have to changehis tune: economic principles really do apply and woe to the accountant or marketerwho runs counter to economic Law. Paradoxically, one of our most elegant andcomplex sectors of economic analysis—the modern theory of finance—is confirmeddaily by millions of statistical observations. When today’s associate professor of security analysis is asked, “Young man, if you’re so smart, why ain’t you rich?”,he replies by laughing all the way to the bank or to his appointment as a high-paidconsultant to Wall Street.Among connoisseurs, Robert C. Merton is known as an expert among experts,a giant who stands on the shoulders of such giants as Louis Bachelier, John BurrWilliams, George Terborgh, Keynes, James Tobin and Harry Markowitz, KennethArrow and Gerard Debreu, John Lintner and William Sharpe, Eugene Fama, BenoitMandelbrot, and the ubiquitous Black-Scholes. (Benjamin Graham occupies anotherpart of the forest.) The pole that propelled Merton to Byronic eminence was themathematical tool of continuous probability `a la Norbert Wiener and Kiyoshi Itˆo.Suddenly what had been complex approximation became beautifully simple truth.The present book patiently explicates for readers with imperfect mathematicalbackground the essentials of efficient-market asset pricing. Many of its chaptersreproduce articles that have become classics in the literature. Several chapters arenew to this book and break novel ground.I am proud to have figured in the Mertonian march to fame. When a youngster,with an electrical engineering bachelor degree and beginning Cal Tech graduate work in applied mathematics, decided to be an economist, he applied to several graduateschools for admission in economics. All but one, he says, turned him down: MIT,
mirabile dictu
, offered him a fellowship! He worked with me and was a joy to work with. One of the great pleasures in academic life is to see a younger savant develop,evolving into a colleague and co-author—and then, best of all, is the rare sight of thecompanion at arms who forges ahead of you as you were able to do at the inflectionpoint of your own career. Robert K. Merton, anthropological observer of the zooof scientists (and fond mentor of Robert C.), will want to add this saga to his casestudies of how science actually evolves.To the reader I repeat:
ii Foreword
 Bon Appetit!
Paul A. SamuelsonMIT

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