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

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.