Option market prices initially diverged from the Black-Scholes model but converged
Evidence
At first, the correspondence between the Black-Scholes-Merton model and patterns of prices on the Chicago Board Options Exchange was fairly poor. Soon, however, it began to improve. The most thorough tests of fit were conducted by Mark Rubinstein (1985), using a subset of a huge data base of nearly all Chicago Board Options Exchange price quotations and transactions between August 1976 and August 1978. — Donald MacKenzie, An Engine, Not a Camera, 735
Categorization
- XREF: Direct evidence for the core performativity thesis: the model’s fit to market prices improved over time as traders adopted it, not vice versa. — connects to: Chicago futures trading diverged from material reality from its very beginnings — Aris Komporozos-Athanasiou, Speculative Communities: Living with…, 86; Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding; Early CBOE options traded at prices wildly above Black-Scholes values — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 102 (+11 more)
Broader Connections
- Organized options trading alone could explain post-model price convergence to Black-Scholes
#expands(0.90) — Donald MacKenzie, An Engine, Not a Camera, 1153 - Index option prices clustered around Black-Scholes values despite greater model complexity
#exemplifies(0.85) — Donald MacKenzie, An Engine, Not a Camera, 786 - Black-Scholes legitimized options despite fitting prices only approximately
#qualifies(0.80) — Donald MacKenzie, An Engine, Not a Camera, 707 - The skew’s persistence after 1987 undermines the discovery narrative of option pricing
#complicates(0.80) — Donald MacKenzie, An Engine, Not a Camera, 1163