Black-Scholes price deviations fell from 2 percent to under 1 percent by 1986
Evidence
Soon, however, the fit began to improve. The most thorough tests of fit were conducted by Rubinstein (1985), using a data set of all CBOE price quotations and transactions between August 1976 and August 1978 for the 30 stocks on which options were most heavily traded. Rubinstein judged the fit of the model without independently estimating j, by constructing from sets of matched pairs of observed option prices the estimate of volatility that minimized deviations from Black-Scholes values. He then calculated the largest deviation from the Black-Scholes prices implied by that volatility, finding typical deviations of around 2%. He later repeated the exercise for the index options that the CBOE began to trade in 1983, finding that by 1986 typical deviations had fallen to less than 1% (Rubinstein 1994, p. 774). By any social science standards it was an excellent fit. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 106
Categorization
- XREF: Quantifies the improving fit over time—key empirical datum for the performativity argument and for financialization history. — connects to: Option market prices initially diverged from the Black-Scholes model but converged — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 735; The 1987 crash permanently broke Black-Scholes fit with market prices — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 150; Regulatory and technical changes made Black-Scholes assumptions come true — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 107
Broader Connections
- Option market prices initially diverged from the Black-Scholes model but converged
#corroborates(0.80) — Donald MacKenzie, An Engine, Not a Camera, 735 - The 1987 crash permanently broke Black-Scholes fit with market prices
#qualifies(0.75) — Donald MacKenzie, An Engine, Not a Camera, 150 - Regulatory and technical changes made Black-Scholes assumptions come true
#corroborates(0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 107