Fischer Black was an economist who applied his analysis of Keynesian and monetarist theories to finance and investment, thereby helping to revolutionize the industry. He was originally an academic at the Graduate School of Business, University of Chicago, where he was Director of the Center for Research in Security Prices, and MIT, before moving to Wall Street and a position at Goldman Sachs. He made the transition at a decisive time, as financial engineering was just emerging, and he played a critical part in applying quantitative strategies to investment practices for the first time. He was the co-author of the famous Black-Scholes equation, which developed an option pricing model that is still used widely today. He would have won the Nobel Prize for Economics but for his untimely death, aged 57, due to cancer.
Black is best known for his work on the problem of how best to price a call option, which had been worked on for many years by researchers taking both a theoretical, and an empirical point of view.
This research produced the celebrated Black-Scholes formula, based on his 1973 paper with Myron Scholes, “The pricing of options and corporate liabilities.”
The Black–Scholes equation derived the Black–Scholes–Merton differential equation, thereby solving the stock option pricing problem.
In the announcement of the 1997 Nobel Prize for Economics, awarded to Myron Scholes and Robert Merton, the Nobel committee pointed out Black’s key role in their work.
Black’s work on option valuation marked the emergence of continuous time finance, which is now used to value derivative instruments across the industry. Derivatives, now traded in their trillions of dollars each year, are mostly valued using the mathematical methods Black helped develop in the early 1970s.
In addition to his work with Scholes and Merton, he also made other important contributions, including his work on portfolio insurance, commodity futures pricing, bond swaps and interest rate futures, global asset allocation models, dividend policy, international trade, business cycles, and labor economics. He was also the co-developer of the Black–Derman–Toy interest-rate derivatives model, originally created for in-house use by Goldman Sachs in the 1980s.
He analyzed the capital asset pricing model (CAPM) in terms of monetary policy and Keynesian economics, and discussed the most effective ways it could be used.
He was a forerunner in the use of computer technology and efficient trading systems.
He thought that trying to model reality was more important than attempting closed-form analytical solutions.
“Most so-called anomalies don’t seem anomalous to me at all. They seem like nuggets from a gold mine, found by one of the thousands of miners all over the world.”Fischer Black
The central focus of the career of Fischer Black (1938–1995) was on teasing out the implications of the capital asset pricing model (CAPM)...
“If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions...
A formula to calculate the value of European style options. The formula was introduced in 1973 by Fischer Black and Myron Scholes. The...