Market conditions moved toward the model’s assumptions partly because of the model itself

Evidence

Gradually, too, the financial markets changed in a way that made the BlackScholes-Merton model’s assumptions, which at first were grossly at variance with market conditions, more realistic. In part, this was a result of technological improvements to price dissemination and transaction processing. It was also a result of the general liberalizing influence of free market economics. At least a small part of the process, however, was the way in which, by making options trading seem legitimate, option theory contributing to the emergence of the high-volume, efficient, low-transaction-cost liquid market the theory posited. — Donald MacKenzie, An Engine, Not a Camera, 1155

Categorization

• XREF: Performativity as world-adapting-to-theory: the world conforms to the model, not just the model to the world — a key counter to the usual realism critique of BSM. — connects to: Financial-sector growth from asset inflation may have exhausted its own model. — Mark Blyth, Austerity: The History of a Dangerous…, 629; The log-normal assumption may have been self-undermining through portfolio insurance. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 191; Using a model can make markets conform less well to it. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 92 (+14 more)

Broader Connections

• A market model can shape markets actively rather than merely describing them #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 1165
• Economic theory succeeded in derivatives markets partly by making markets conform to it #corroborates (0.95) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 9
• Traders’ arbitrage activity made the pricing model appear empirically true #expands (0.90) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126
• Market actions based on efficient-market models can create anomalies those models cannot explain #qualifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1166