Black Schole Model – an Econophysics Approach

Abstract

The Black Scholes model of option pricing constitutes the cornerstone of contemporary valuation theory. However, the model presupposes the existence of several unrealistic assumptions including the lognormal distribution of stock market price processes. In the past decade or so, physicists have begun to do academic research in economics. Perhaps people are now actively involved in an emerging field often called Econophysics. Econophysics applies statistical physics methods to economical, financial, and social problems. The main goal of this study is threefold: 1) lists out the derivation of the Black-Scholes formula through the partial differential equation based on the construction of the complete “hedge portfolio”, 2) to provide a brief introduction to the problem of pricing financial derivatives in continuous time; 3) and finally we will show the totality theory  developed in the previous section with a concrete example.