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Derivative Pricing 60 Years before Black–Scholes: Evidence from the Johannesburg Stock Exchange

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  • LYNDON MOORE
  • STEVE JUH

Abstract

We obtain daily data for warrants traded on the Johannesburg Stock Exchange between 1909 and 1922, and for a broker's call option quotes on stocks from 1908 to 1911. We use this new data set to test how close derivative prices are to Black–Scholes (1973) prices and to compute profits for investors using a simple trading rule for call options. We examine whether investors exercised warrants optimally and how they reacted to extensions of the warrants' durations. We show that long before the development of the formal theory, investors had an intuitive grasp of the determinants of derivative pricing.

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  • 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.
    • Handle: RePEc:bla:jfinan:v:61:y:2006:i:6:p:3069-3098
    DOI: 10.1111/j.1540-6261.2006.01012.x
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    Cited by:

    1. Chambers, David, 2019. "Commodity Option Pricing Efficiency before Black Scholes Merton," CEPR Discussion Papers 13975, C.E.P.R. Discussion Papers.
    2. Carola Frydman & Raven E. Saks, 2010. "Executive Compensation: A New View from a Long-Term Perspective, 1936--2005," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 2099-2138.
    3. Flandreau, Marc & Oosterlinck, Kim, 2012. "Was the emergence of the international gold standard expected? Evidence from Indian Government securities," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 649-669.
    4. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.
    5. Turner, John D., 2014. "Financial history and financial economics," QUCEH Working Paper Series 14-03, Queen's University Belfast, Queen's University Centre for Economic History.
    6. Oosterlinck, Kim & Ureche-Rangau, Loredana & Vaslin, Jacques-Marie, 2014. "Baring, Wellington and the Resurrection of French Public Finances Following Waterloo," The Journal of Economic History, Cambridge University Press, vol. 74(4), pages 1072-1102, December.
    7. 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.
    8. 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.
    9. 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.
    10. Drelichman, Mauricio & Voth, Hans-Joachim, 2011. "Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600," Explorations in Economic History, Elsevier, vol. 48(1), pages 1-19, January.
    11. Oosterlinck, Kim & Ureche-Rangau, Loredana & Vaslin, Jacques-Marie, 2019. "Aristocratic Privilege. Exploiting “Good†Institutions," CEPR Discussion Papers 14071, C.E.P.R. Discussion Papers.
    12. 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.
    13. Wurm, Laura, 2021. "Strangling speculation: The effect of the 1903 Viennese futures trading ban," QUCEH Working Paper Series 21-09, Queen's University Belfast, Queen's University Centre for Economic History.

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