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A Test of the Black and Scholes Model of Option Evaluation in the Australian Options Market

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  • R. L. Brown

    (Department of Economics University of Sydney and Commonwealth Banking Corporation, Sydney. I am indebted to G. Foster, W. Merilees and I.G. Sharpe for their comments on an earlier draft.)

Abstract

Black and Scholes' model of option valuation is tested using Australian data over the period February 1976 to June 1977. The valuation equation is solved in reverse to obtain implied standard deviation rates of return on the underlying stocks. These are compared to various historical measures of standard deviation available at the time of trade and to estimates of the standard deviations which actually resulted. In general, the model produces upward-biased estimates (implying that the model tends to under-price), but the degree of bias is lower in 1977 than in the previous year. However, it is not yet possible to be certain of the causes of this difference.

Suggested Citation

  • R. L. Brown, 1978. "A Test of the Black and Scholes Model of Option Evaluation in the Australian Options Market," Australian Journal of Management, Australian School of Business, vol. 3(1), pages 17-35, April.
    • Handle: RePEc:sae:ausman:v:3:y:1978:i:1:p:17-35
    DOI: 10.1177/031289627800300102
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    References listed on IDEAS

    as
    1. 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.
    2. Latane, Henry A & Rendleman, Richard J, Jr, 1976. "Standard Deviations of Stock Price Ratios Implied in Option Prices," Journal of Finance, American Finance Association, vol. 31(2), pages 369-381, May.
    3. 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.
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