Anomalies in option pricing: the Black-Scholes model revisited
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.
Volume (Year): (1996)
Issue (Month): Mar ()
|Contact details of provider:|| Postal: |
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:fip:fedbne:y:1996:i:mar:p:17-40. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If references are entirely missing, you can add them using this form.