Traders using the pricing model actively made market prices conform to the model

Evidence

The increasing use of models seems to have begun to have direct effects on prices. That the Black-Scholes-Merton model had, in the CBOE’s early years, a tendency to price options lower than its competitors gave it a certain general selective advantage, so long as it did not expose those using it to undue risks (a topic to which we return below). Above all, though, the model could readily be adapted for a simple arbitrage (feasible even for individual market makers) that had been used since the CBOE’s foundation: spreading, looking for discrepancies in the prices of different classes of options on the same underlying stock, buying relatively underpriced options and selling overpriced ones (Galai 1977). … When spreaders used Black-Scholes to identify discrepancies, it would be precisely deviations from that flat line that their activities tended to arbitrage away. The model was, therefore, helped to pass its central econometric test by the market activities of those who used it. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126

Categorization

• DEEPTHINKING: This is the core performativity mechanism in miniature: the model passes its own empirical test because practitioners’ arbitrage activities enforce the model’s predictions — a self-fulfilling loop at the heart of the thesis.
• XREF: Connects to the reader’s established work on performativity of economic theory (Callon, MacKenzie) and to Friedman’s as-if methodology debates. — connects to: Traders’ arbitrage activity made the pricing model appear empirically true — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126; A market model can shape markets actively rather than merely describing them — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1165; Financial pricing formulas actively construct the markets they purport to measure — Max Haiven, Cultures of Financialization, 84 (+5 more)

Related

• Traders’ arbitrage activity made the pricing model appear empirically true (similarity 0.93)
• Traders used the model’s own arbitrage logic to profit in the market. (similarity 0.91)
• The model’s use helped create the price patterns the model predicted (similarity 0.90)
• Market conditions moved toward the model’s assumptions partly because of the model itself (similarity 0.90)
• Traders arbitraging model discrepancies directly improved the model’s econometric test results (similarity 0.88)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.86)
• A market model can shape markets actively rather than merely describing them (similarity 0.86)
• The model’s assumptions became more realistic as markets restructured around it (similarity 0.85)
• The Black-Scholes model gained market traction slowly, not through instant self-fulfilling prophecy. (similarity 0.85)
• Econometric model tests can be passed because traders’ arbitrage removes model deviations. (similarity 0.85)
• Option pricing converged on economic models through traders copying other users. (similarity 0.84)
• The market changed to fit Black-Scholes rather than the reverse (similarity 0.84)
• Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. (similarity 0.84)
• Arbitrage is the chief channel achieving Barnesian performativity in finance (similarity 0.84)
• Option market prices initially diverged from the Black-Scholes model but converged (similarity 0.84)

Broader Connections

• Traders’ arbitrage activity made the pricing model appear empirically true #expands (0.95) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126
• Market conditions moved toward the model’s assumptions partly because of the model itself #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 1155
• The model’s use helped create the price patterns the model predicted #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 1154
• A market model can shape markets actively rather than merely describing them #expands (0.92) — Donald MacKenzie, An Engine, Not a Camera, 1165
• The model’s assumptions became more realistic as markets restructured around it #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 741
• Traders used the model’s own arbitrage logic to profit in the market. #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 731
• Financial pricing formulas actively construct the markets they purport to measure #expands (0.85) — Max Haiven, Cultures of Financialization, 84
• Economic theory succeeded in derivatives markets partly by making markets conform to it #expands (0.80) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 9