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SUMMARY:Efficient derivatives pricing before Black\, Scholes and Merton: e
 vidence from the interwar London Metals Exchange     - Dr Rasheed Saleuddi
 n\, UCL and Centre for Financial History
DTSTART:20180507T160000Z
DTEND:20180507T173000Z
UID:TALK104830@talks.cam.ac.uk
CONTACT:Dr Duncan Needham
DESCRIPTION:We show in this paper that option traders in the early twentie
 th century were able to intuit 'fair' value well before the advent of Blac
 k Scholes Merton-type (BSM) pricing models. Previous studies of early opti
 on price data disagree as to whether pre-1973 traders incorporated modern 
 understandings of options valuations. Kairys and Valero (1997) claim they 
 did not\, whilst Mixon (2009) and Moore and Juh (2006) conclude that many 
 elements of modern models are revealed in the scant records of early optio
 n trading. None of these three studies find that historical options prices
  were approximately BSM efficient. Our study of metal options traded in Lo
 ndon in the 1920s and 1930s by John Maynard Keynes concludes that prices w
 ere remarkably close to BSM-efficient. The level of mispricing we observe 
 is not out of line with more sophisticated derivative markets today. Not o
 nly did Keynes' option traded prices approximate BSM levels\, but these pr
 ices were as sensitive to changes in the key BSM valuation parameter\, for
 ecast volatility\, as they are in today's markets. Although BSM was undoub
 tedly a better measure of value than the heuristics previously employed in
  early 20th century options markets\, we conclude that options were noneth
 eless efficiently priced even before this important innovation.
LOCATION:Darwin College (Seminar Room\, No. 1 Newnham Terrace - entrance v
 ia Porters Lodge on Silver St)
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