Commodity Option Pricing Efficiency before Black Scholes Merton

David Chambers

No 13975, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: It is often thought that the arrival of the Black Scholes Merton (BSM) model of option pricing in the early 1970s allowed traders to understand how to price and value options with greater precision. Yet, our study suggests that interwar commodity option traders may have been able to intuit ‘fair’ value and to adjust their prices to changes in the market environment well before the advent of this innovative model. A scarcity of historical price data has limited empirical tests of option price efficiency well before BSM to prior studies of stock options in the 1870s and the early twentieth century which reach contrasting findings. This study deals with option pricing in a different market – commodities – during the interwar period. We conclude that option prices were closer to their BSM theoretical values than suggested by prior studies. Institutional differences between interwar commodity options market and stock option markets in the 1870s and the early twentieth century may partly account for this result. Furthermore, we find that interwar option prices were no more mispriced and were as sensitive to changes in volatility – the key valuation parameter in the BSM model – as in modern times.

Keywords: Options; Warrants; Black-scholes; Commodities; London metals exchange; Market efficiency; Performativity (search for similar items in EconPapers)
JEL-codes: G1 G2 N2 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cepr.org/publications/DP13975 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13975

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13975
orders@cepr.org

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by (repec@cepr.org).