Organized options trading alone could explain post-model price convergence to Black-Scholes

Evidence

Option pricing is the aspect of finance theory whose performativity has been examined most closely in the previous chapters. The fit between the BlackScholes-Merton model and empirical patterns of option prices was originally only approximate, but it improved rapidly after the model was published and adopted by market practitioners. There is no way of being certain that the improved fit was due to the practical adoption of the model: the year of its publication also saw the opening in Chicago of the first modern options exchange, and the development of organized options trading would have had an effect on patterns of prices quite independent of the model. — Donald MacKenzie, An Engine, Not a Camera, 1153

Categorization

• XREF: The confounding-variable worry (model vs. organized-exchange opening) is the same identification problem threaded throughout the performativity literature from earlier chapters. — connects to: Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding; Option pricing converged on economic models through traders copying other users. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 183; Option market prices initially diverged from the Black-Scholes model but converged — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 735 (+6 more)

Broader Connections

• Option pricing theory did not describe markets but remade them in its own image #expands (0.85) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182
• The skew’s persistence after 1987 undermines the discovery narrative of option pricing #complicates (0.78) — Donald MacKenzie, An Engine, Not a Camera, 1163