Weatherall, James Owen (2017) The Peculiar Logic of the Black-Scholes Model. [Preprint]
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Abstract
The Black-Scholes(-Merton) model of options pricing establishes a theoretical relationship between the "fair" price of an option and other parameters characterizing the option and prevailing market conditions. Here I discuss a common application of the model with the following striking feature: the (expected) output of analysis apparently contradicts one of the core assumptions of the model on which the analysis is based. I will present several attitudes one might take towards this situation, and argue that it reveals ways in which a "broken" model can nonetheless provide useful (and tradeable) information.
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| Item Type: | Preprint | ||||||
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| Additional Information: | Presented in the 2016 PSA Symposoium "How are Economic Models Used (and How Should They Be)?" | ||||||
| Keywords: | Black-Scholes model Black-Scholes formula Volatility smile Economic models Scientific models | ||||||
| Subjects: | Specific Sciences > Economics General Issues > Models and Idealization |
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| Depositing User: | James Owen Weatherall | ||||||
| Date Deposited: | 30 May 2017 20:17 | ||||||
| Last Modified: | 30 May 2017 20:17 | ||||||
| Item ID: | 13078 | ||||||
| Subjects: | Specific Sciences > Economics General Issues > Models and Idealization |
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| Date: | May 2017 | ||||||
| URI: | https://philsci-archive.pitt.edu/id/eprint/13078 |
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