The skew’s persistence after 1987 undermines the discovery narrative of option pricing

Evidence

Given the three-phase history, it is hard to sustain the view that the second phase of the empirical history of option pricing, the close fit between the model and empirical patterns of market prices from the mid 1970s to the summer of 1987, was simply the discovery by market participants of the correct way to price options. It is more plausible to see the third phase, the emergence of the skew, as rational learning from the near-catastrophe of October 1987 (the huge price movements of October 19 can be seen as an emphatic rejection of the null hypothesis of log-normality), but even here there are difficulties. — Donald MacKenzie, An Engine, Not a Camera, 1163

Categorization

• XREF: Central to the book’s core argument against the ‘model as discovery’ view versus performativity — the three-phase history is the evidentiary backbone. — connects to: Chicago futures trading diverged from material reality from its very beginnings — Aris Komporozos-Athanasiou, Speculative Communities: Living with…, 86; Option pricing theory serves as the test case for performativity. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 124; The discovery-then-acceptance narrative misdescribes how financial economics shaped markets — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 386 (+9 more)
• SEED: The skew as ‘over-learning’ — markets correcting beyond what fat tails justify — is a striking angle for an essay on how markets can overshoot in calibrating to models.

Broader Connections

• Post-1987 German options skew ran opposite to the U.S. skew #complicates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1590