Louis Bachelier’s Theory of Speculation

March 29, 1900, is considered by many to be the day mathematical finance was born. On that day a French doctoral student, Louis Bachelier, successfully defended his thesis Théorie de la Spéculation at the Sorbonne. The jury, while noting that the topic was "far away from those usually considered by our candidates," appreciated its high degree of originality. This book provides a new translation, with commentary and background, of Bachelier's seminal work.Bachelier's thesis is a remarkable document on two counts. In mathematical terms Bachelier's achievement was to introduce many of the concepts of what is now known as stochastic analysis. His purpose, however, was to give a theory for the valuation of financial options. He came up with a formula that is both correct on its own terms and surprisingly close to the Nobel Prize-winning solution to the option pricing problem by Fischer Black, Myron Scholes, and Robert Merton in 1973, the first decisive advance since 1900.Aside from providing an accurate and accessible translation, this book traces the twin-track intellectual history of stochastic analysis and financial economics, starting with Bachelier in 1900 and ending in the 1980s when the theory of option pricing was substantially complete. The story is a curious one. The economic side of Bachelier's work was ignored until its rediscovery by financial economists more than fifty years later. The results were spectacular: within twenty-five years the whole theory was worked out, and a multibillion-dollar global industry of option trading had emerged.

Mark Davis and Alison Etheridge have done a splendid job in translating the Bachelier thesis, thus making it accessible to a wide audience. Apart from the thesis itself, they provide the reader with institutional information, a biography of Bachelier, and a short history of the development of stochastic analysis and mathematical finance. The result is a nice slim volume that will certainly be on the bookshelves of everyone interested in the subject. -- Tomas Bjork, Professor of Mathematical Finance, Stockholm School of Economics This gem of a book will please many readers, including students and researchers in economics, finance, mathematics, and physics. Beyond presenting an annotated translation of Bachelier's original thesis, it also provides a historical overview of the key scientific developments in various fields related to the concepts Bachelier introduced. It reads very well and offers great insight into the historical developments of probability and mathematical finance. -- Paul Embrechts, ETH Zurich, coauthor of "Quantitative Risk Management" Louis Bachelier's thesis is a seminal work, and to have it readily accessible will be a most valuable contribution to the field. This book represents a timely look back at the scientific origins of the enormously important modern-day finance industry. -- Chris Rogers, University of Cambridge, coauthor of" Diffusions, Markov Processes and Martingales, Volumes 1 and 2"

Foreword vii Preface xiii Chapter One: Mathematics and Finance 1 Chapter Two: Theorie de la Speculation 15 Chapter Three: From Bachelier to Kreps, Harrison and Pliska 80 Chapter Four: Facsimile of Bachelier's Original Thesis 116 References 183