The October 1987 crash ended the flat volatility curve predicted by Black-Scholes

Evidence

By 2000, however, a crucial aspect of the BlackScholes-Merton model was almost never present. As we saw in chapter 6, in that model the relationship between the strike price and the implied volatility of options on the same underlying asset with the same time to expiration is a flat line. In the fall of 1987, however, the flat-line relationship, empirically manifest in the late 1970s and the early 1980s, disappeared, and was replaced by a distinct “skew” Figure 7. — Donald MacKenzie, An Engine, Not a Camera, 900

Categorization

• XREF: This is the key empirical anomaly that drives the post-1987 evolution of option pricing models; connects to MacKenzie’s broader argument about the limits of performativity when models fail. — 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 1987 crash ended the Black-Scholes model’s empirical fit for good — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 904 (+5 more)

Broader Connections

• The 1987 crash ended the Black-Scholes model’s empirical fit for good #corroborates (0.92) — Donald MacKenzie, An Engine, Not a Camera, 904
• The post-1987 volatility skew became a permanent feature of index options #expands (0.88) — Donald MacKenzie, An Engine, Not a Camera, 901
• Black-Scholes fit option prices well for eleven years, then stopped after 1987 #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 902
• The 1987 crash ended the Barnesian performativity of classic option-pricing theory #responds-to (0.75) — Donald MacKenzie, An Engine, Not a Camera, 942
• Fat-tailed price distributions were documented decades before the 1987 crash #qualifies (0.72) — Donald MacKenzie, An Engine, Not a Camera, 1163