On Performativity: Option Theory and the Resistance of Financial Phenomena

Nicolas Brisset ()

No 2016-31, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: The issue of performativity concerns the claim that economics shape rather than merely describing the social world. This idea took hold following a paper by Donald MacKenzie and Yuval Millo entitled “Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange” (2003). This paper constitutes an important contribution to the history of economic thought since it provides an original way to focus on the scientific construction of the real economy. The authors discuss the empirical success of the Black-Scholes-Merton (BSM) model on the Chicago Board Options Exchange (CBOE) during the period 1973-1987. They explain this success in part as instead of discovering pre-existing price regularities, it was used by traders to anticipate options’ prices in their arbitrages. As a result, options’ prices came to correspond to the theoretical prices derived from the BSM model. In the present article I show that this is not a completely correct conclusion since the BSM model never became a self-fulfilling model. I would claim that the October 1987 stock market crash is empirical proof that the financial world never fitted with the economic theory underpinning the BSM.

Keywords: Performativity; Black-Scholes-Merton; Self-fulfillment (search for similar items in EconPapers)
JEL-codes: B23 B41 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016-10
New Economics Papers: this item is included in nep-his, nep-hme, nep-hpe and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: ON PERFORMATIVITY: OPTION THEORY AND THE RESISTANCE OF FINANCIAL PHENOMENA (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:gre:wpaper:2016-31

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