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The genesis of the Black-Scholes option pricing formula

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  • Heimer, Thomas
  • Arend, Sebastian
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    Abstract

    Innovations in the finance industry are an important tool to enhance profitability and to increase a nation's wealth. It, therefore, is not astonishing that there is much empirical work on innovations in finance. Most of the work however is concerned with the design of innovative products. The question on how innovations are established and pushed through in financial markets is mostly neglected. Hardly any asks: How do we develop new ways of pricing derivatives, how do we enhance risk control, how do we generate new processes that may enhance the profitability of finance business? The second sector innovation theory in the last decades has taken a different approach. To understand innovation better researchers have focused on the question on how innovations have been emerging. Studies on the history of innovations opened a promising line of research that helps to understand innovation processes much better (see Hughes 1983 und Callon 1986). A similar approach has yet not been adapted to innovation theories in financial markets.1 Accordingly it is the articles objective to evaluate the outcome of a transfer of innovation theories from the second into the third sector. The transfer is conducted on the example of the BlackScholes option pricing formula, an innovation with a strong influence on the efficiency of decisions in the option market. The article shows how the innovation emerged and what factors influenced the diffusion process. --

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    Bibliographic Info

    Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 98.

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    Date of creation: 2008
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    Handle: RePEc:zbw:fsfmwp:98

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    Keywords: Innovation; finance; diffusion;

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    1. Dickler, Robert A. & Schalast, Christoph, 2006. "Distressed debt in Germany: What's next? Possible innovative exit strategies," Frankfurt School - Working Paper Series 73, Frankfurt School of Finance and Management.
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    3. Böttger, Marc & Guthoff, Anja & Heidorn, Thomas, 2008. "Loss Given Default - Modelle zur Schätzung von Recovery Rates," Frankfurt School - Working Paper Series 96, Frankfurt School of Finance and Management.
    4. Heidorn, Thomas & Schmaltz, Christian & Kunze, Wolfgang, 2008. "Liquiditätsmodellierung von Kreditzusagen (term facilities and revolver)," Frankfurt School - Working Paper Series 93, Frankfurt School of Finance and Management.
    5. Ansgar Belke & Thorsten Polleit, 2005. "(How) Do Stock Market Returns React to Monetary Policy? - An ARDL Cointegration Analysis for Germany," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 253/2005, Department of Economics, University of Hohenheim, Germany.
    6. Hirsch, Christian & Bannier, Christina E., 2007. "The economics of rating watchlists: Evidence from rating changes," CFS Working Paper Series 2008/02, Center for Financial Studies (CFS).
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    8. Schalast, Christoph & Ockens, Klaas & Jobe, Clemens J. & Safran, Robert, 2006. "Work-out und Servicing von notleidenden Krediten: Berichte und Referate des HfB-NPL Servicing Forums 2006," Frankfurt School - Working Paper Series 76, Frankfurt School of Finance and Management.
    9. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
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    11. Demidova-Menzel, Nadeshda & Heidorn, Thomas, 2007. "Gold in the investment portfolio," Frankfurt School - Working Paper Series 87, Frankfurt School of Finance and Management.
    12. Schanz, Kay-Michael & Schalast, Christoph, 2006. "Wertpapierprospekte: Markteinführungspublizität nach EU-Prospektverordnung und Wertpapierprospektgesetz 2005," Frankfurt School - Working Paper Series 74, Frankfurt School of Finance and Management.
    13. Schanz, Kay-Michael & Richard, Jörg & Schalast, Christoph, 2004. "Unternehmen im Prime Standard staying public oder going private? Nutzenanalyse der Börsennotiz," Frankfurt School - Working Paper Series 60, Frankfurt School of Finance and Management.
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