Hostname: page-component-6587cd75c8-vfwnz Total loading time: 0 Render date: 2025-04-24T07:15:16.996Z Has data issue: false hasContentIssue false
  • English
  • Français

Further Reflections Based on the Black–Scholes (B-S) Model

Published online by Cambridge University Press:  16 September 2024

Arturo Cifuentes Open the ORCID record for Arturo Cifuentes [Opens in a new window]  and
Ventura Charlin Open the ORCID record for Ventura Charlin [Opens in a new window]
Arturo Cifuentes*
Affiliation:
Principal Researcher, Clapes UC-Catholic University of Chile, Santiago, Chile
Ventura Charlin
Affiliation:
Senior Research Associate, Clapes UC-Catholic University of Chile, Santiago, Chile; Principal, VC Consultants, New York, NY, USA, 10021
*
Corresponding author: Arturo Cifuentes; Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The Black–Scholes (B-S) model is considered by the academic environment one of the greatest achievements of financial economics. Yet it brings with it some conundrums. The model is often used in a manner that contradicts one of its assumptions, and its predictions are not supported by market reality. Here we address, from the perspective of philosophy of science, an additional issue related to this model: the distinction between its explanatory and predictive capabilities.

Type
Discussion Note
Information
Philosophy of Science , Volume 92 , Issue 1 , January 2025 , pp. 223 - 228
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Philosophy of Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Asay, Michael. 1976. “Testing the Black and Scholes Model of Call Option Valuation.” American Economist 20 (2):27–34. https://doi.org/10.1177/056943457602000205.CrossRefGoogle Scholar
Black, Fischer, and Scholes, Myron. 1973. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81 (3):637–54. https://doi.org/10.1086/260062.CrossRefGoogle Scholar
Breiman, Leo. 2001. “Statistical Modeling: The Two Cultures (With Comments and a Rejoinder by the Author).” Statistical Science 16 (3):199–231. https://doi.org/10.1214/ss/1009213726.CrossRefGoogle Scholar
De Scheemaekere, Xavier. 2009. “The Epistemology of Modern Finance.” Journal of Philosophical Economics 2 (2):99–120. https://doi.org/10.46298/jpe.10578.Google Scholar
Federal Reserve Bank of New York. 2021. “Federal Reserve Special Facilities Initiated in Response to COVID-19.” https://www.newyorkfed.org/medialibrary/media/markets/13-3-facilities/facility-summary-table-2021.Google Scholar
Friedman, Milton. 1953. “The Methodology of Positive Economics.” In Essays in Positive Economics, 3–43. Chicago: University of Chicago Press.Google Scholar
Haug, Espen Gaarder, and Nicholas Taleb, Nassim. 2011. “Option Traders Use (Very) Sophisticated Heuristics, Never the Black–Scholes–Merton Formula.” Journal of Economic Behavior & Organization 77 (2):97–106. https://doi.org/10.1016/j.jebo.2010.09.013.CrossRefGoogle Scholar
Helmer, Olaf, and Rescher, Nicholas. 1959. “On the Epistemology of the Inexact Sciences.” Management Science 6 (1):25–52. https://doi.org/10.1287/mnsc.6.1.25.CrossRefGoogle Scholar
Hempel, Carl G., and Oppenheim, Paul. 1948. “Studies in the Logic of Explanation.” Philosophy of Science 15 (2):135–75. https://doi.org/10.1086/286983.CrossRefGoogle Scholar
Hindriks, Frank. 2008. “False Models as Explanatory Engines.” Philosophy of the Social Sciences 38 (3):334–60. https://doi.org/10.1177/0048393108319414.CrossRefGoogle Scholar
Hindriks, Frank. 2013. “Explanation, Understanding, and Unrealistic Models.” Studies in History and Philosophy of Science Part A 44 (3):523–31. https://doi.org/10.1016/j.shpsa.2012.12.004.CrossRefGoogle Scholar
Kumar, Rajesh, and Agrawal, Rachna. 2017. “An Empirical Investigation of the Black-Scholes Call Option Pricing Model with Reference to NSE.” International Journal of BRIC Business Research 6 (2):1–11. https://doi.org/10.14810/ijbbr.2017.6201.CrossRefGoogle Scholar
Londono, Juan M., and Anne Wilson, Beth. 2018. “Understanding Global Volatility.” In IFDP Notes. Washington, DC: Board of Governors of the Federal Reserve System. https://doi.org/10.17016/2573-2129.40.Google Scholar
Markowitz, Harry M. 1952. “Portfolio Selection.” Journal of Finance 7 (1):71–91.Google Scholar
Pfleiderer, Paul. 2020. “Chameleons: The Misuse of Theoretical Models in Finance and Economics.” Economica 87 (345):81–107. https://doi.org/10.1111/ecca.12295.CrossRefGoogle Scholar
Redroban, Shirley, and Cifuentes, Arturo. 2021. “On the Performance of the Black and Scholes Options Pricing Formulas during the Subprime and Covid-19 Crises.” Journal of Corporate Accounting and Finance 32 (3):75–85. https://doi.org/10.1002/jcaf.22504.CrossRefGoogle Scholar
Sainani, Kristin L. 2014. “Explanatory versus Predictive Modeling.” PM&R 6 (9):841–44. https://doi.org/10.1016/j.pmrj.2014.08.941.Google ScholarPubMed
Shmueli, Galit. 2010. “To Explain or to Predict?” Statistical Science 25 (3):289–310. https://doi.org/10.1214/10-STS330.CrossRefGoogle Scholar
Vergara-Fernández, Melissa, and de Bruin, Boudewijn. 2021. “Finance and Financial Economics: A Philosophy of Science Perspective.” In The Routledge Handbook of the Philosophy of Economics, edited by Heilmann, Conrad and Reiss, Julian, 198–207. New York: Routledge.CrossRefGoogle Scholar
Weatherall, James Owen. 2018. “The Peculiar Logic of the Black-Scholes Model.” Philosophy of Science 85 (5):1152–63. https://doi.org/10.1086/699677.CrossRefGoogle Scholar
Weinberg, John. 2015. “Federal Reserve Credit Programs During the Meltdown 2007–2010.” Federal Reserve Bank of Richmond. https://www.federalreservehistory.org/essays/fed-credit-programs.Google Scholar
Wible, James R. 1982. “Friedman’s Positive Economics and Philosophy of Science.” Southern Economic Journal 49 (2):350–60. https://doi.org/10.2307/1058487.CrossRefGoogle Scholar