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Samuelsonian Economics and the Twenty-First Century$
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Michael Szenberg, Lall Ramrattan, and Aron A. Gottesman

Print publication date: 2006

Print ISBN-13: 9780199298839

Published to Oxford Scholarship Online: January 2009

DOI: 10.1093/acprof:oso/9780199298839.001.0001

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Paul Samuelson and Financial Economics

Paul Samuelson and Financial Economics

(p.262) 18 Paul Samuelson and Financial Economics
Samuelsonian Economics and the Twenty-First Century

Robert C. Merton

Oxford University Press

This chapter's appraisal places models of time and uncertainty in household allocation of resources at the center of the Samuelson Contribution. It assesses Samuelson's contributions to the areas of efficient market theory and risk analysis, portfolio selection, and option and warrant pricing. Samuelson found that efficient markets do not allocate resources the way casinos do. Rather, asset prices vary randomly around an optimal path that can be discerned mathematically. The theory links spot price with future prices in order to forge a solution where spot prices are determined by optimal control theory. Samuelson's work in warrants and option pricing provides a bridge between early and later option pricing models, thanks to his insights on hedging and mathematical analysis that were incorporated into subsequent theories.

Keywords:   options, hedging, efficient market, spot prices, future prices, speculative price, optimal path, optimal control theory

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