The 1987 crash ended the Black-Scholes model’s empirical fit for good

Evidence

There is little doubt that the 1987 crash is the event that separates the second and third phases of the history of option pricing, and there appears to be econometric consensus. No analysis now finds the Black-Scholes-Merton model to fit the observed pattern of prices of options well; all find a volatility skew that is variable in nature but, in general, has in the case of options on stock indices roughly the same pattern as in the lower graph in figure 7.1; and the skew is evident both in the index options traded on the Chicago Board Options Exchange and in the options on index futures traded on the Chicago Mercantile Exchange. — Donald MacKenzie, An Engine, Not a Camera, 904

Categorization

• DEEPTHINKING: This is the pivot of the entire performativity story — a single exogenous crash permanently broke a model’s grip on market prices; no analysis since finds the model fitting. Dense with implications for the limits of performativity.
• XREF: connects to: The 1987 crash permanently broke Black-Scholes fit with market prices — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 150; Post-crash repairs aimed to recreate the idealized Black-Scholes pricing world. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 884; The October 1987 crash ended the flat volatility curve predicted by Black-Scholes — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 900 (+3 more)

Broader Connections

• The 1987 crash ended the Barnesian performativity of classic option-pricing theory #corroborates (0.95) — Donald MacKenzie, An Engine, Not a Camera, 942
• Black-Scholes fit option prices well for eleven years, then stopped after 1987 #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 902