Paul Samuelson and Financial Economics

AbstractThis 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.