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Trading options before Black‐Scholes: a study of the market in late seventeenth‐century London1

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  • ANNE L. MURPHY

Abstract

This article uses data from the ledgers of the financial broker Charles Blunt to explore the market in equity options that emerged in London during the stock market boom of the early 1690s. Blunt's ledgers provide a unique opportunity to observe the workings of an early modern derivatives market. They reveal a broadly based and highly active trade in options. The market functioned well, determined value using agreed criteria, and was utilized by a diverse range of individuals to facilitate both risk‐seeking and risk‐averse investment strategies.

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  • Anne L. Murphy, 2009. "Trading options before Black‐Scholes: a study of the market in late seventeenth‐century London1," Economic History Review, Economic History Society, vol. 62(s1), pages 8-30, August.
    • Handle: RePEc:bla:ehsrev:v:62:y:2009:i:s1:p:8-30
    DOI: 10.1111/j.1468-0289.2008.00454.x
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    References listed on IDEAS

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    1. Kairys, Joseph P, Jr & Valerio, Nicholas, III, 1997. "The Market for Equity Options in the 1870s," Journal of Finance, American Finance Association, vol. 52(4), pages 1707-1723, September.
    2. Lyndon Moore & Steve Juh, 2006. "Derivative Pricing 60 Years before Black–Scholes: Evidence from the Johannesburg Stock Exchange," Journal of Finance, American Finance Association, vol. 61(6), pages 3069-3098, December.
    3. Murphy, Anne L., 2005. "Lotteries in the 1690s: Investment or Gamble?," Financial History Review, Cambridge University Press, vol. 12(02), pages 227-246, October.
    4. Christine Macleod, 1986. "The 1690s Patents Boom: Invention or Stock-Jobbing?," Economic History Review, Economic History Society, vol. 39(4), pages 549-571, November.
    5. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    6. Ann M. Carlos & Larry Neal, 2006. "The micro‐foundations of the early London capital market: Bank of England shareholders during and after the South Sea Bubble, 1720–251," Economic History Review, Economic History Society, vol. 59(3), pages 498-538, August.
    7. Carlos, Ann M. & Key, Jennifer & Dupree, Jill L., 1998. "Learning and the Creation of Stock-Market Institutions: Evidence from the Royal African and Hudson's Bay Companies, 1670–1700," The Journal of Economic History, Cambridge University Press, vol. 58(2), pages 318-344, June.
    8. Black, Fischer & Scholes, Myron S, 1972. "The Valuation of Option Contracts and a Test of Market Efficiency," Journal of Finance, American Finance Association, vol. 27(2), pages 399-417, May.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Murphy, Anne L., 2014. "Making the market: Trading debt at the Eighteenth-Century Bank of England," eabh Papers 14-05, The European Association for Banking and Financial History (EABH).
    2. William Quinn, 2019. "Squeezing the bears: cornering risk and limits on arbitrage during the ‘British bicycle mania’, 1896–8," Economic History Review, Economic History Society, vol. 72(4), pages 1286-1311, November.
    3. Helen Paul, 2015. "Editorial: Women in economic and social history: twenty-fifth anniversary of the Women's Committee of the Economic History Society," Economic History Review, Economic History Society, vol. 68(2), pages 1-17, May.
    4. Ureche-Rangau, Loredana & Vaslin, Jacques-Marie, 2023. "Conversion risk on 19th century French consols and embedded options: A simple exercise," Finance Research Letters, Elsevier, vol. 58(PB).

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