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Anomalies in option pricing: the Black-Scholes model revisited

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  • Peter Fortune

Abstract

In 1973, Myron Scholes and the late Fischer Black published their seminal paper on option pricing. The Black-Scholes model revolutionized financial economics in several ways: It contributed to our understanding of a wide range of contracts with option-like features, and it allowed us to revise our understanding of traditional financial instruments. This article addresses the question of how well the Black-Scholes model of option pricing works. The goal is to acquaint a general audience with the key characteristics of a model that is still widely used, and to indicate the opportunities for improvement that might emerge from current research. The article reviews the key features of the Black-Scholes model, identifying some of its most prominent assumptions. The author then employs recent data on almost one-half million options transactions to evaluate the Black-Scholes model. He discusses some of the reasons why the Black-Scholes model falls short, and goes on to assess recent research designed to improve our ability to explain option prices.

Suggested Citation

  • Peter Fortune, 1996. "Anomalies in option pricing: the Black-Scholes model revisited," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 17-40.
  • Handle: RePEc:fip:fedbne:y:1996:i:mar:p:17-40
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    Citations

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    Cited by:

    1. Shiller, Robert J., 1999. "Human behavior and the efficiency of the financial system," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 20, pages 1305-1340 Elsevier.
    2. Nicolas Brisset, 2016. "On Performativity: Option Theory and the Resistance of Financial Phenomena," GREDEG Working Papers 2016-31, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

    More about this item

    Keywords

    Options (Finance);

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