Applications

Abstract

A tradition had been started by Louis Bachelier in 1900 but had been lost from finance until Robert Merton resurrected it in the early 1970s. Merton recognized the importance of economic analyses over time when uncertainty exists. He also recognized the relevance of the tools of stochastic calculus developed for the space race arising as a result of the Cold War. However, his reintroduction of continuous-time stochastic calculus to finance and economics, after the 70-year period of dormancy, awakened both economics and finance, and has resulted in a productive outpouring of results that have rewritten and generalized much of what we thought we previously understood.