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Criticism of the Black-Scholes Model: But Why Is It Still Used? (The Answer Is Simpler than the Formula)

Orhun Yalincak

MPRA Paper from University Library of Munich, Germany

Abstract: The Black Scholes Model (BSM) is one of the most important concepts in modern financial theory both in terms of approach and applicability. The BSM is considered the standard model for valuing options; a model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. However, while the formula has been subject to repeated criticism for its shortcomings, it is still in widespread use. This paper provides a brief overview of BSM, its foundational underpinnings, as well as discusses these shortcomings vis-à-vis alternative models.

Keywords: Black-Scholes model; finance; financial modeling; financial theory; volatility; option pricing (search for similar items in EconPapers)
JEL-codes: C0 C00 C5 C50 D0 D00 E00 E03 G1 G10 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (1)

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