the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search

Submit Your Paper

In Rememberance: World Trade Center (WTC)

Export citation to:
- Text (plain)
- BibTeX

Merton, Robert C., "On the Pricing of Contingent Claims and the Modigliani-Miller Theorem", Journal of Financial Economics, Vol. 5, No. 2, (November 1977), pp. 241-249.

Abstract: A general formula is derived for the price of a security whose value under specified conditions is a known function of the value of another security. Although the formula can be derived using the arbitrage technique of Black and Scholes, the alternative approach of continuous-time portfolio strategies is used instead. This alternative derivation allows the resolution of some controversies surrounding the Black and Scholes methodology. Specifically, it is demonstrated that the derived pricing formula must be continuous with continuous first derivatives, and that there is not a 'pre-selection bias' in the choice of independent variables used in the formula. Finally, the alternative derivation provides a direct proof of the Modigliani-Miller theorem even when there is a positive probability of bankruptcy.

Download paper (614K PDF) 9 pages

Most Cited Books within Credit Pricing Papers