Black-Scholes fit option prices well for eleven years, then stopped after 1987

Evidence

The empirical history of option pricing in the United States, therefore, falls into three distinct phases. The first two phases were described in chapter 6. Before the April 1973 opening of the Chicago Board Options Exchange, and in the first year or so of its operation, there were substantial differences between patterns of market prices and Black-Scholes values. A second phase had begun by 1976 and lasted until summer 1987. In it, the Black-ScholesMerton model was an excellent fit to market prices. … The third phase in the empirical history of option pricing is from autumn 1987 to the present, when the Black-Scholes-Merton model’s fit has again been poor, especially for index options, in the crucial matter of the relationship between strike price and implied volatility. The Black-Scholes-Merton flat-line relationship vanished, and it has not returned. — Donald MacKenzie, An Engine, Not a Camera, 902

Categorization

• XREF: Establishes the empirical periodization of option pricing that anchors the whole performativity thesis; connects to chapter 6’s account of early discrepancies and the counterperformativity to come. — connects to: Post-1987 index put prices consistently exceeded Black-Scholes levels — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 892; The October 1987 crash ended the flat volatility curve predicted by Black-Scholes — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 900; The post-1987 volatility skew became a permanent feature of index options — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 901 (+4 more)
• ADDENDUM: The post-1987 skew phase illustrates counterperformativity in markets, complementing my infrastructure/sacrifice pieces as another case where a working system breaks after a shock.

Broader Connections

• The 1987 crash permanently broke Black-Scholes fit with market prices #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 150
• The skew’s persistence after 1987 undermines the discovery narrative of option pricing #complicates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1163
• Early CBOE options traded at prices wildly above Black-Scholes values #qualifies (0.70) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 102