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.
Australian Options Market, 1976a, Dealing in Options: An Explanatory Booklet on Exchange Traded Call Options, 2nd ed., (Australian Options Market, Sydney).
2.
Australian Options Market, 1976b, Options - The Versatile Investment: A Guide (Australian Options Market, Sydney).
3.
Australian Options Market, 1976c, Understanding Options: A Guide (Australian Options Market, Sydney).
4.
Bird, A. and A. Henfrey, 1975, “The Chicago Board Options Exchange”, The Investment Analyst, 43, 6–23.
5.
Black, F., 1975, “Fact and Fantasy in the Use of Options”, Financial Analysts Journal, 31, 36–72.
6.
Black, F. and M. Scholes, 1972, “The Valuation of Option Contracts and a Test of Market Efficiency”, Journal of Finance, 27, 399–418.
7.
Black, F. and M. Scholes, 1973, “The Pricing of Options and Corporate Liabilities”, Journal of Political Economy, 81, 637–54.
8.
Cox, J.C. and S.A. Ross, 1976, “The Valuation of Options for Alternative Stochastic Processes”, Journal of Financial Economics, 3, 145–66.
9.
Galai, D., 1977, “Tests of Market Efficiency of the Chicago Board Options Exchange”, Journal of Business, 50, 167–97.
10.
Garman, M.B., 1976, “An Algebra for Evaluating Hedge Portfolios”, Journal of Financial Economics, 3, 403–27.
11.
Gastineau, G.L., 1975, The Stock Options Manual (McGraw-Hill, New York).
12.
Latane, H.A. and R.J. Rendleman, 1976, “Standard Deviations of Stock Price Ratios Implied in Option Prices”, Journal of Finance, 31, 369–81.
13.
Merton, R.C., 1973, “Theory of Rational Option Pricing”, Bell Journal of Economics and Management Science, 4, 141–83.
14.
Merton, R.C., 1974, “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates”, Journal of Finance, 29, 449–70.
15.
Merton, R.C., 1976a, “Option Pricing When Underlying Stock Returns Are Discontinuous”, Journal of Financial Economics, 3, 125–44.
16.
Merton, R.C., 1976b, “The Impact on Option Pricing of Specification Error in the Underlying Stock Price Returns”, Journal of Finance, 31, 333–50.
17.
Merton, R.C., M. Scholes and M.L. Gladstein, 1976, “A Simulation of the Return and Risk of Alternative Option Portfolio Investment Strategies”, Journal of Business, forthcoming.
18.
Noti, G., 1977, “The Effect of Taxation on the Valuation of Options”, JASSA, June, 20–24.
19.
Ross, S.A., 1976, “The Arbitrage Theory of Capital Asset Pricing”, Journal of Economic Theory, 13, 341–60.
20.
Scholes, M., 1976, “Taxes and the Pricing of Options”, Journal of Finance, 31, 319–32.
21.
Smith C.W., 1976, “Option Pricing: A Review”, Journal of Financial Economics, 3, 3–51.
