IDEAS home Printed from https://ideas.repec.org/a/bla/ehsrev/v62y2009is1p8-30.html
   My bibliography  Save this article

Trading options before Black‐Scholes: a study of the market in late seventeenth‐century London1

Author

Listed:
  • ANNE L. MURPHY

Abstract

This article uses data from the ledgers of the financial broker Charles Blunt to explore the market in equity options that emerged in London during the stock market boom of the early 1690s. Blunt's ledgers provide a unique opportunity to observe the workings of an early modern derivatives market. They reveal a broadly based and highly active trade in options. The market functioned well, determined value using agreed criteria, and was utilized by a diverse range of individuals to facilitate both risk‐seeking and risk‐averse investment strategies.

Suggested Citation

  • Anne L. Murphy, 2009. "Trading options before Black‐Scholes: a study of the market in late seventeenth‐century London1," Economic History Review, Economic History Society, vol. 62(s1), pages 8-30, August.
    • Handle: RePEc:bla:ehsrev:v:62:y:2009:i:s1:p:8-30
    DOI: 10.1111/j.1468-0289.2008.00454.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-0289.2008.00454.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-0289.2008.00454.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kairys, Joseph P, Jr & Valerio, Nicholas, III, 1997. "The Market for Equity Options in the 1870s," Journal of Finance, American Finance Association, vol. 52(4), pages 1707-1723, September.
    2. Black, Fischer & Scholes, Myron S, 1972. "The Valuation of Option Contracts and a Test of Market Efficiency," Journal of Finance, American Finance Association, vol. 27(2), pages 399-417, May.
    3. Ann M. Carlos & Larry Neal, 2006. "The micro‐foundations of the early London capital market: Bank of England shareholders during and after the South Sea Bubble, 1720–251," Economic History Review, Economic History Society, vol. 59(3), pages 498-538, August.
    4. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Murphy, Anne L., 2005. "Lotteries in the 1690s: Investment or Gamble?," Financial History Review, Cambridge University Press, vol. 12(02), pages 227-246, October.
    7. Christine Macleod, 1986. "The 1690s Patents Boom: Invention or Stock-Jobbing?," Economic History Review, Economic History Society, vol. 39(4), pages 549-571, November.
    8. Carlos, Ann M. & Key, Jennifer & Dupree, Jill L., 1998. "Learning and the Creation of Stock-Market Institutions: Evidence from the Royal African and Hudson's Bay Companies, 1670–1700," The Journal of Economic History, Cambridge University Press, vol. 58(2), pages 318-344, June.
    9. Lyndon Moore & Steve Juh, 2006. "Derivative Pricing 60 Years before Black–Scholes: Evidence from the Johannesburg Stock Exchange," Journal of Finance, American Finance Association, vol. 61(6), pages 3069-3098, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Murphy, Anne L., 2014. "Making the market: Trading debt at the Eighteenth-Century Bank of England," eabh Papers 14-05, The European Association for Banking and Financial History (EABH).
    2. Helen Paul, 2015. "Editorial: Women in economic and social history: twenty-fifth anniversary of the Women's Committee of the Economic History Society," Economic History Review, Economic History Society, vol. 68(2), pages 1-17, May.
    3. Ureche-Rangau, Loredana & Vaslin, Jacques-Marie, 2023. "Conversion risk on 19th century French consols and embedded options: A simple exercise," Finance Research Letters, Elsevier, vol. 58(PB).
    4. William Quinn, 2019. "Squeezing the bears: cornering risk and limits on arbitrage during the ‘British bicycle mania’, 1896–8," Economic History Review, Economic History Society, vol. 72(4), pages 1286-1311, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chambers, David, 2019. "Commodity Option Pricing Efficiency before Black Scholes Merton," CEPR Discussion Papers 13975, C.E.P.R. Discussion Papers.
    2. Robert Brooks & Joshua A. Brooks, 2017. "An Option Valuation Framework Based On Arithmetic Brownian Motion: Justification And Implementation Issues," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 40(3), pages 401-427, September.
    3. David Chambers & Rasheed Saleuddin, 2020. "Commodity option pricing efficiency before Black, Scholes, and Merton," Economic History Review, Economic History Society, vol. 73(2), pages 540-564, May.
    4. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.
    5. Haug, Espen Gaarder & Taleb, Nassim Nicholas, 2011. "Option traders use (very) sophisticated heuristics, never the Black-Scholes-Merton formula," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 97-106, February.
    6. Kim Oosterlinck & Loredana Ureche-Rangau & Jacques-Marie Vaslin, 2014. "Baring, Wellington and the resurrection of French public finances following Waterloo," Post-Print CEB, ULB -- Universite Libre de Bruxelles, vol. 74(4), pages 1072-1102, November.
    7. Rosa Ferrentino & Luca Vota, 2022. "A Mathematical Model for the Pricing of Derivative Financial Products: the Role of the Banking Supervision and of the Model Risk," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 11(1), pages 1-2.
    8. Charles J. Corrado & Tie Su, 1996. "Skewness And Kurtosis In S&P 500 Index Returns Implied By Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, June.
    9. Smith, Paul & Gronewoller, Paul & Rose, Lawrence C., 1998. "Pricing efficiency on the New Zealand Futures and Options Exchange," Journal of Multinational Financial Management, Elsevier, vol. 8(1), pages 49-62, January.
    10. Michael J. Gombola & Rodney L. Roenfeldt & Philip L. Cooley, 1978. "Spreading Strategies In Cboe Options: Evidence On Market Performance," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 1(1), pages 35-44, December.
    11. David S. Bates, 1995. "Testing Option Pricing Models," NBER Working Papers 5129, National Bureau of Economic Research, Inc.
    12. Ovidiu Racorean, 2013. "Time-independent pricing of options in range bound markets," Papers 1304.6846, arXiv.org, revised Jul 2013.
    13. Scholes, Myron S, 1998. "Derivatives in a Dynamic Environment," American Economic Review, American Economic Association, vol. 88(3), pages 350-370, June.
    14. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite [The Theory of Fair Geometric Returns]," MPRA Paper 87082, University Library of Munich, Germany.
    15. Ghosh, Dilip K. & Ghosh, Dipasri, 2005. "Covered arbitrage with currency options: A theoretical analysis," Global Finance Journal, Elsevier, vol. 16(1), pages 86-98, August.
    16. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    17. Millo, Yuval & MacKenzie, Donald, 2009. "The usefulness of inaccurate models: Towards an understanding of the emergence of financial risk management," Accounting, Organizations and Society, Elsevier, vol. 34(5), pages 638-653, July.
    18. Huang, Yu Chuan & Chen, Shing Chun, 2002. "Warrants pricing: Stochastic volatility vs. Black-Scholes," Pacific-Basin Finance Journal, Elsevier, vol. 10(4), pages 393-409, September.
    19. Mohammad Abedi & Daniel Bartolomeo, 2019. "Entropic Dynamics of Exchange Rates and Options," Papers 1908.06358, arXiv.org.
    20. Brown, C. A. & Taylor, S. D., 1997. "A test of the Asay model for pricing options on the SPI futures contract," Pacific-Basin Finance Journal, Elsevier, vol. 5(5), pages 579-594, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ehsrev:v:62:y:2009:i:s1:p:8-30. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/ehsukea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.