Yalincak, Orhun Hakan (2005): Criticism of the BlackScholes Model: But Why Is It Still Used? (The Answer Is Simpler than the Formula).

PDF
MPRA_paper_63208.pdf Download (647kB)  Preview 
Abstract
The Black Scholes Model (BSM) is one of the most important concepts in modern financial theory both in terms of approach and applicability. The BSM is considered the standard model for valuing options; a model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. However, while the formula has been subject to repeated criticism for its shortcomings, it is still in widespread use. This paper provides a brief overview of BSM, its foundational underpinnings, as well as discusses these shortcomings visàvis alternative models.
Item Type:  MPRA Paper 

Original Title:  Criticism of the BlackScholes Model: But Why Is It Still Used? (The Answer Is Simpler than the Formula). 
English Title:  Criticism of the BlackScholes Model: But Why Is It Still Used? (The Answer Is Simpler than the Formula). 
Language:  English 
Keywords:  BlackScholes model, finance, financial modeling, financial theory, volatility, option pricing, 
Subjects:  C  Mathematical and Quantitative Methods > C0  General C  Mathematical and Quantitative Methods > C0  General > C00  General C  Mathematical and Quantitative Methods > C5  Econometric Modeling C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C50  General D  Microeconomics > D0  General D  Microeconomics > D0  General > D00  General E  Macroeconomics and Monetary Economics > E0  General > E00  General E  Macroeconomics and Monetary Economics > E0  General > E03  Behavioral Macroeconomics G  Financial Economics > G1  General Financial Markets G  Financial Economics > G1  General Financial Markets > G10  General 
Item ID:  63208 
Depositing User:  Mr. Orhun Hakan Yalincak 
Date Deposited:  26. Mar 2015 05:24 
Last Modified:  26. Mar 2015 05:28 
References:  Black, F., Scholes, M., “The Pricing of Options and Corporate Liabilities,” (1973) 81(3) The Journal of Political Economy 637654). Carr, P., Wu, L., “Time Change Lévy Processes and Option Pricing” (2002), found at <http://www.math.nyu.edu/research/carrp/papers/pdf/jfetchgepaper.pdf> last accessed 28th June, 2012. Chris, N.A., ‘BlackScholes and Beyond: Options Pricing Models’ (McGraw Hill, 1997). Formula, found at < http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012075> last accessed on 30 June, 2012> Cont, R., Tankov, P., “Financial Modelling with Jump Processes” (CRC Press: 2003). Derman, E., “Laughter in the Dark – The Problem of the Volatility Smile,” 26th May, 2003, found at <http://www.ederman.com/new/docs/euronextvolatility_smile.pdf> last accessed 28th June, 2012. Fortune, P., “Anomalies in Options Pricing: the BlackScholes Model Revisited” (1986) Federal Reserve Bank of Boston, found at <http://www.bos.frb.org/economic/neer/neer1996/neer296b.htm>, last accessed 30th June, 2012. Hallerbach, W.G., “An Improved Estimator of BlackScholesMerton Implied Volatility” (2004), found at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=567721>, last accessed on 30th June, 2012. Heston, S.L., Nandi, S., (1997) A ClosedForm GARCH Option Pricing Model, found at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=96651>, last accessed 28th June, 2012. Hull, J.C., Options Futures and Other Derivatives (5th edn., Prentice Hall, 2002). Jorion, P., “Risk Management Lessons from LongTerm Capital Management” (1999). Millo, Y., MacKenzie, D., “The Usefulness of Inaccurate Models: Financial Risk Management ‘In the Wild.’” (2009) 3(1) The Journal of Risk Model Valuation 2349, found at <http://www.risk.net/digital_assets/5044/jrm_v3n1a2.pdf> last accessed 28th June, 2012. Morters, P., Peres, Y., Schramm, Werner, W., Brownian Motion (Cambridge University Press: Cambridge, 2010). Sattayatham, P., Intarasit, A., and Chaiyasema, A.P., (2006) “A Fractional BlackScholes Model With Jumps”, found at <http://science.sut.ac.th/mathematics/pairote/uploadfiles/baibao7_AJ.PDF>, last accessed on 1st July, 2012. Schwartz, R.J., & Smith, C.W., “Derivatives Handbook: Risk Management & Control” (John Wiley & Sons, Inc., 1997). Scholes, M., “Autobiography” in Frangsmyr, T., The Nobel Prizes 1997, (Nobel Prize Foundation, Stockholm 1998). Taleb, N., Haug, E.G., Option Traders Use (very) Sophisticated Heuristics, Never the Black–Scholes–Merton Formula, found at < http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012075> last accessed on 30 June, 2012. Teneng, D., Limitations of the BlackScholes Model, (2011) 68 Int’l.R.J.F.E. 99102. Tomas, B., Henrik, H., (2005) "A Note on Wick Products and Fractional Black Scholes Model”, found at <http://ideas.repec.org/p/hhs/hastef/0596.html>, last accessed on 1st July, 2012. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/63208 