The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Options (New Perspectives)

  • Thaleia Zariphopoulou
Reference work entry


This article provides an overview of risk-neutral valuation methodology and presents historical milestones in the development of quantitative finance. It also discusses current challenges and new perspectives in model choice, pricing and hedging.


Arbitrage Bachelier, L. Brace-Gatarek-Musiela model Barrier options Call options Continuous-time models Copulas Credit default obligations Credit default swaps Credit risk Derivatives Exotics Heath–Jarrow–Morton model Hedging Incomplete markets Libor Martingales Model calibration Model specification Option valuation Options Real options Reduced-form models of default Risk measures Risk-neutral pricing Risk-neutral valuation Stochastic integration theory Structural models of default Swap market models Term structure models Value at risk Vanilla options Volatility smile Yield curve 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Artzner, P., F. Delbaen, J.M. Eber, and D. Heath. 1999. Coherent measures of risk. Mathematical Finance 9: 203–228.CrossRefGoogle Scholar
  2. Bachelier, L. 1900. Théorie de la spéculation. Ph.D. dissertation L’ Ecole Normale Supérieure. English translation in The Random Character of Stock Market Prices, ed. P.H. Cootner. Cambridge, MA: MIT Press.Google Scholar
  3. Bielecki, T.R., and M. Rutkowski. 2002. Credit risk: Modeling, valuation and hedging. Berlin: Springer.Google Scholar
  4. Bjork, T. 2004. Arbitrage theory in continuous time. 2nd ed. Oxford: Oxford University Press.CrossRefGoogle Scholar
  5. Black, F., and M. Scholes. 1973. The pricing of options and corporate liabilities. Journal of Political Economy 81: 637–654.CrossRefGoogle Scholar
  6. Delbaen, F., and W. Schachermayer. 2006. The mathematics of arbitrage. Berlin: Springer.Google Scholar
  7. Dupire, B. 1993. Pricing and hedging with a smile. Journées Internationales de Finance. La Baule: IGR–AFFI.Google Scholar
  8. Harrison, M., and D.M. Kreps. 1979. Martingales and arbitrage in multi-period security markets. Journal of Economic Theory 20: 381–408.CrossRefGoogle Scholar
  9. Harrison, M., and S. Pliska. 1981. Martingales and stochastic integrals in the theory of continuous trading. Stochastic Processes and Applications 11: 215–260.CrossRefGoogle Scholar
  10. Heath, D., R.A. Jarrow, and A. Morton. 1992. Bond pricing and the term structure of interest rates: A new methodology for contingent claim valuation. Econometrica 60: 77–105.CrossRefGoogle Scholar
  11. Li, D.X. 2000. On default correlation: A copula function approach. Journal of Fixed Income 9: 43–54.CrossRefGoogle Scholar
  12. Merton, R. 1973. Theory of rational option pricing. Bell Journal of Economics and Management Science 4: 141–183.CrossRefGoogle Scholar
  13. Merton, R. 1998. Applications of option-pricing theory: Twenty-five years later. American Economic Review 88: 323–349.Google Scholar
  14. Musiela, M. 1993. Stochastic PDEs and term structure models. Journées Internationales de Finance. La Baule: IGR-AFFI.Google Scholar
  15. Musiela, M., and M. Rutkowski. 2005. Martingale methods in financial modelling. 2nd ed. Berlin: Springer.Google Scholar
  16. Schönbucher, P.J. 2003. Credit derivatives pricing models. Model, pricing and implementation. Chichester: Wiley.Google Scholar
  17. Sklar, A. 1959. Fonctions de répartition à n dimensions et leures marges. Publications de l’Institut de Statistique de l’ Université de Paris 8: 229–231.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Thaleia Zariphopoulou
    • 1
  1. 1.