Merton that is used to assess the credit risk of a companys debt. Dumas and lucianos \the economics of continuous time finance kerry backs \asset pricing and portfolio choice theory. The blackscholesmerton model as an idealization of. Merton s widelyused text provides an overview and synthesis of finance theory from the perspective of continuous time analysis. Discrete states and discrete time the number of possible stock prices and time steps are both nite. A conceptual framework for analyzing the financial system page 3 ways in which these activities are carried out, however, have changed quite a bit thr ough the ages. It covers individual finance choice, corporate finance, financial intermediation, capital markets, and selected topics on the interface between private and public finance. An analytic derivation of the cost of deposit insurance and loan guarantees. It develops the continuous time mathematical modeling of finance, provides an overview and synthesis of finance theory from the perspective of continuous time. Darrell duffie dean witter distinguished professor of finance, stanford university, california in this monograph, david m. Continuous time finance which includes a few overview chapters and a collection of merton s classic articles. An application of modern option pricing theory journal of banking and finance 1 june 1977. The nonstationary structure of the debt that leads to the termination of operations on a.
Geske 10 extended the merton model to the case of bonds of di. Additionally, i also recommend the following books. Continuous states stock price can be anything between 0 and 1 and continuous time time goes continuously. Foreword a great economist of an earlier generation said that, useful though economic theory is for understanding the world, no one would go to an economic theorist for advice on how to run a brewery or produce a mousetrap. World scientific reference on contingent claims analysis in corporate finance. The merton model is only a starting point for studying credit risk, and is obviously far from realistic. The merton model is an analysis model named after economist robert c.
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