Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-13T01:39:51.609Z Has data issue: false hasContentIssue false
  • English
  • Français

ON PERFORMATIVITY: OPTION THEORY AND THE RESISTANCE OF FINANCIAL PHENOMENA

Published online by Cambridge University Press:  09 October 2017

Nicolas Brisset
Nicolas Brisset*
Affiliation:
Université Côte d’Azur, CNRS, GREDEG, France. Nicolas.BRISSET@unice.fr.
Get access Rights & Permissions [Opens in a new window]

Abstract

The issue of performativity concerns the claim that economics shape rather than merely describe the social world. This idea took hold following a paper by Donald MacKenzie and Yuval Millo entitled “Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange” (2003). That paper constitutes an important contribution to the history of economic thought, since it provides an original way to focus on the scientific construction of the real economy. The authors discuss the empirical success of the Black–Scholes–Merton (BSM) model on the Chicago Board Options Exchange during the period from 1973 to 1987. They explain this success in part as instead of discovering pre-existing price regularities, the model was used by traders to anticipate option prices in their arbitrages. As a result, option prices came to correspond to the theoretical prices derived from the BSM model. In the present article I show that this is not a completely correct conclusion, since the BSM model never became a self-fulfilling model. I would claim that the October 1987 stock market crash is empirical proof that the financial world never fit with the economic theory underpinning the BSM.

Type
Articles
Information
Journal of the History of Economic Thought , Volume 39 , Issue 4 , December 2017 , pp. 549 - 569
Copyright
Copyright © The History of Economics Society 2017 

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.)

References

REFERENCES

Bachelier, Louis. 1900. “Théorie de la spéculation.” Annales de l’École normale supérieure 3 (27): 21–86.CrossRefGoogle Scholar
Beaver, William. 1981. “Market Efficiency.” The Accounting Review 56: 23–37.Google Scholar
Bernstein, Peter. L. 1995. Against the Gods. Hoboken: Wiley.Google Scholar
Bernstein, Peter. L. 2005. Capital Ideas. The Improbable Origins of Modern Wall Street. Hoboken: Wiley.Google Scholar
Bernstein, Peter. L. 2007. Capital Ideas Evolving. Hoboken: Wiley.Google Scholar
Black, Fischer. 1975. “Fact and Fantasy in the Use of Options.” Financial Analysts Journal 31 (4): 36–72.Google Scholar
Black, Fischer. 1989. “How to Use the Hole in Black-Scholes.” Journal of Applied Corporate Finance 1 (4): 67–73.Google Scholar
Black, Fischer, and Scholes, Myron. 1973. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81 (3): 637–654.Google Scholar
Black, Fischer, Jensen, Michael, and Scholes, Myron. 1972. “The Capital Asset Pricing Model: Some Empirical Tests.” In Jensen, M., ed., Studies in the Theory of Capital Markets. New York: Praeger Publishers, pp. 79–121.Google Scholar
Blanchard, Olivier, and Watson, Mark. 1982. “Bubbles, Rational Expectations and Financial Markets.” NBER Working Paper Series, n. 945.Google Scholar
Brian, Éric. 2009. Comment tremble la main invisible. Incertitude et marchés. Paris: Springer.Google Scholar
Brisset, Nicolas. 2011. “Les limites de la performativité des énoncés en économie: les apports de John Searle.” Oeconomia 1 (4): 557–588.Google Scholar
Brisset, Nicolas. 2012. “Deux approches de l’influence du discours économique sur les phénomènes sociaux.” Revue de philosophie économique 13 (2): 25–62.Google Scholar
Brisset, Nicolas. 2014a. “Performer par le dispositif ? Un retour critique sur la théorie de la performativité.” L’année sociologique 64 (1): 217–246.Google Scholar
Brisset, Nicolas. 2014b. “Performativité des énoncés de la théorie économique: une approche conventionnaliste.” PhD dissertation, University of Lausanne and University of Paris 1 Panthéon-Sorbonne.Google Scholar
Brisset, Nicolas. 2016. “Economics Is Not Always Performative: Some Limits for Performativity.” Journal of Economic Methodology 23 (2): 160–184.Google Scholar
Callon, Michel. 1998. “The Embeddedness of Economic Markets in Economics.” In Callon, Michel, ed., The Laws of the Markets. Oxford: Plon, pp. 1–57.Google Scholar
Callon, Michel. 2007. “What Does It Mean to Say That Economics Is Performative?” In MacKenzie, D., Muniesa, F., and Siu, L., eds., Do Economists Make Markets? Princeton: Princeton University Press, pp. 311–357.Google Scholar
Cochoy, Franck, Giraudeau, Martin, and McFall, Liz, eds. 2014. The Limits of Performativity. London and New York: Routledge.Google Scholar
Cootner, Paul. 1964. The Random Character of Stock Market Prices. Cambridge, MA: MIT Press.Google Scholar
Cowles, Alfred. 1933. “Can Stock Market Forecasters Forecast?” Econometrica 1 (2): 309–324.Google Scholar
Davis, Mark, and Etheridge, Alison. 2006. Louis Bachelier’s Theory of Speculation: The Origins of Modern Finance Princeton: Princeton University Press.Google Scholar
Durand, David. 1959. “The Cost of Capital, Corporation Finance, and the Theory of Investment: Comment.” The American Economic Review 49 (4): 639–655.Google Scholar
Fama, Eugene. 1965. “The Behavior of Stock-Market Prices.” Journal of Business 38 (1): 34–105.Google Scholar
Fama, Eugene. 1970. “Efficient Capital Markets: A Review of the Theory and Empirical Work.” Journal of Finance 25 (2): 383–417.Google Scholar
Fama, Eugene. 1976a. Foundations of Finance. New York: Basic Books.Google Scholar
Fama, Eugene. 1976b. “Reply.” The Journal of Finance 31 (1): 143–145.Google Scholar
Fama, Eugene. 1991. “Efficient Capital Markets II.” Journal of Finance 46 (5): 1575–1617.Google Scholar
Fortune, Peter. 1996. “Anomalies in Option Pricing: The Black–Scholes Model Revisited.” New England Economic Review (March–April): 17–40.Google Scholar
Graham, Benjamin, and Dodd, David L.. 1934. Security Analysis. New York: Whittlesey House.Google Scholar
Hagerman, Robert. 1978. “More Evidence of the Distribution of Security Returns.” Journal of Finance 33 (4): 1213–1221.Google Scholar
Harrison, Michael, and Kreps, David. 1979. “Martingales and Arbitrage in Multiperiod Securities Markets.” Journal of Economic Theory 20: 381–408.Google Scholar
Harrison, Michael, and Pliska, Stanley. 1981. “Martingales and Stochastic Integrals in the Theory of Continuous Trading.” Stochastic Processes and Applications: 215–260.Google Scholar
Jackwerth, Jens Carsten. 1999. “Option Implied Risk-Neutral Distributions and Implied Binomial Trees: A Literature Review.” Journal of Derivatives 7 (2): 66–82.Google Scholar
Jackwerth, Jens Carsten, and Rubinstein, Mark. 1996. “Recovering Probability Distributions from Option Prices.” The Journal of Finance 51 (5): 1611–1631.Google Scholar
Jarrow, Robert A., and Rosenfeld, Eris R.. 1984. “Jump Risks and the Intertemporal Capital Asset Pricing Model.” Journal of Business 57 (3): 337–351.Google Scholar
Jegadeesh, Narasimhan, and Titman, Sheridan. 1993. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” The Journal of Finance 48 (1): 65–91.Google Scholar
Jensen, Michael. 1978. “Some Anomalous Evidence Regarding Market Efficiency.” Journal of Financial Economics 6 (2/3): 95–101.Google Scholar
Jovanovic, Franck. 2001. “Pourquoi l’hypothèse de marche aléatoire en théorie financière ? Les raisons historiques d’un choix éthique.” Revue d’économie financière 61 (1): 203–211.Google Scholar
Jovanovic, Franck. 2008. “The Construction of the Canonial History of Financial Economics.” History of Political Economy 40 (2): 213–242.Google Scholar
Jovanovic, Franck. 2009. “L’institutionnalisation de l’économie financière : perspectives historiques.” Revue d’histoire des sciences humaines 20 (1): 3–9.Google Scholar
Jovanovic, Franck, and Schinckus, Christophe. 2013a. “The Emergence of Econophysics: A New Approach in Modern Financial Theory.” History of Political Economy 45 (3): 443–474.Google Scholar
Jovanovic, Franck, and Schinckus, Christophe. 2013b. “Econophysics: A New Challenge for Financial Economics?”. Journal of the History of Economic Thought 35 (3): 319–352.Google Scholar
Keynes, John Maynard. [1936] 2006. The General Theory of Employment, Interest and Money. New Delhi: Atlantic Publishers & Dist.Google Scholar
LeRoy, Stephen. 1973. “Risk Aversion and the Martingale Property of Stock Prices.” International Economic Review 14: 436–446.Google Scholar
LeRoy, Stephen. 1976. “Efficient Capital Market: A Comment.” Journal of Finance 31 (1): 139–141.Google Scholar
LeRoy, Stephen. 1989. “Efficient Capital Market and Martingales.” Journal of Economic Literature 27 (4): 1583–1621.Google Scholar
Lintner, John. 1965. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics 47 (1): 13–37.Google Scholar
Long, John B. 1990. “The Numeraire Portfolio.” Journal of Financial Economics 26: 29–69.Google Scholar
Lucas, Robert E. 1978. “Asset Prices in an Exchange Economy.” Econometrica 46: 1429–1445.Google Scholar
MacKenzie, Donald. 2003. “An Equation and Its Worlds: Bricolage, Exemplars, Disunity and Performativity in Financial Economics.” Social Studies of Science 33: 831–868.Google Scholar
MacKenzie, Donald. 2004. “The Big, Bad Wolf and the Rational Market: Portfolio Insurance, the 1987 Crash and the Performativity of Economics.” Economy and Society 33 (3): 303–334.Google Scholar
MacKenzie, Donald. 2006a. “Is Economics Performative? Option Theory and the Construction of Derivatives Markets.” Journal of the History of Economic Thought 28 (1): 29–55.CrossRefGoogle Scholar
MacKenzie, Donald. 2006b. An Engine, Not a Camera. Cambridge and London: The MIT Press.Google Scholar
MacKenzie, Donald. 2007. “Is Economics Performative? Option Theory and the Construction of Derivatives Markets.” In MacKenzie, D., Muniesa, F., and Siu, L., eds., Do Economists Make Markets? Princeton: Princeton University Press, pp. 54–86.Google Scholar
MacKenzie, Donald. 2009. Material Markets. How Economic Agents Are Constructed. New York: Oxford University Press.Google Scholar
MacKenzie, Donald. 2010. “Models as Coordination Devices.” In Akrich, M., Barth, Y., Muniesa, F., and Mustar, P., eds., Débordements. Paris: Presses des Mines, pp. 299–302.Google Scholar
MacKenzie, Donald, and Millo, Yuval. 2003. “Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange.” American Journal of Sociology 109: 107–145.Google Scholar
MacKenzie, Donald, and Spears, Taylor. 2014. “‘The Formula That Killed Wall Street’: The Gaussian Copula and Modelling Practices in Investment Banking.” Social Studies of Science 44: 393–417.Google Scholar
MacKenzie, Donald, Muniesa, Fabian, and Siu, Lucia, eds. 2007. Do Economists Make Markets? Princeton: Princeton University Press.Google Scholar
Mandelbrot, Benoît. 1963. “The Variation of Certain Speculative Prices.” Journal of Business 36 (4): 394–419.Google Scholar
Mandelbrot, Benoît. 1966. “Forecasts of Future Prices, Unbiased Markets, and ‘Martingale’ Models.” Journal of Business 39 (1): 242–255.Google Scholar
Mandelbrot, Benoît. 1973. “Le syndrôme de la variance infinie et ses rapports avec la discontinuité des prix.” Économie appliquée 26: 321–348.Google Scholar
Mandelbrot, Benoît. 2009. “Il était inévitable que des choses très graves se produisent.” Le Monde, 18 October 2009.Google Scholar
Malkiel, Burton. 1989. “Is the Stock Market Efficient?” Science 243: 1313–1318.Google Scholar
Markowitz, Harry Max. 1952. “Portfolio Selection.” Journal of Finance 7: 77–91.Google Scholar
Mehrling, Perry. 2012. Fischer Black and the Revolutionary Idea of Finance. Hoboken: Wiley.Google Scholar
Merton, Robert C. 1973. “Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science 4 (1): 141–183.Google Scholar
Merton, Robert C. 1976. “Optimal Pricing When Underlying Stock Returns Are Discontinuous.” Journal of Financial Economics 3: 125–144.Google Scholar
Merton, Robert K. 1948. “The Self-Fulfilling Prophecy.” Antioch Review 8 (2): 193–210.Google Scholar
Modigliani, Franco, and Miller, Merton H.. 1958. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review 48: 655–669.Google Scholar
Mirowski, Philip. 1989. “Tis a Pity Econometrics Isn’t an Empirical Endeavor: Mandelbrot, Chaos and the Noah and Joseph Effects.” Ricerche Economiche 43: 76–99.Google Scholar
Mirowski, Philip. 1990. “From Mandelbrot to Chaos in Economic Theory.” Southern Economic Journal 57 (2): 289–307.Google Scholar
Mirowski, Philip. 1995. “Mandelbrot’s Economics after a Quarter Century.” Fractals 3: 581–600.CrossRefGoogle Scholar
Mossin, Jan. 1966. “Equilibrium in a Capital Asset Market.” Econometrica 34 (4): 768–783.Google Scholar
Muniesa, Fabian. 2007. “Economic Experiments and the Construction of Market.” In MacKenzie, D., Muniesa, F., and Siu, L., eds., Do Economists Make Markets? Princeton: Princeton University Press, pp. 163–189.Google Scholar
Osborne, Matthew. 1959. “Brownian Motion in the Stock Market.” Operations Research 7: 145–173.Google Scholar
Orléan, André. 2011. L’empire de la valeur. Paris: Seuil.Google Scholar
Press, James. 1967. “A Compound Events Model for Security Prices.” Journal of Business 40 (3): 317–335.Google Scholar
Regnault, Jules. 1863. Calcul des chances et philosophie de la bourse. Paris: Mallet-Bachelier et Castel.Google Scholar
Roberts, Harry. 1959, “Stock-Market ‘Patterns’ and Financial Analysis: Methodological Suggestions.” Journal of Finance 14 (1): 1–10.Google Scholar
Rubinstein, Mark. 1985. “Nonparametric Tests of Alternative Option Pricing Models Using All Reported Trades and Quotes on the 30 Most Active CBOE Option Classes from August 23, 1976 Through August 31, 1978.” The Journal of Finance 40 (2): 455–480.Google Scholar
Samuelson, Paul. 1938. “A Note on the Pure Theory of Consumer’s Behaviour.” Economica 6: 344–356.Google Scholar
Samuelson, Paul. 1965a. “Proof that Properly Anticipated Prices Fluctuate Randomly.” Industrial Management Review 6: 41–49.Google Scholar
Samuelson, Paul. 1965b. “A Rational Theory of Warrant Pricing.” Industrial Management Review 6: 13–39.Google Scholar
Samuelson, Paul. 1973. “Proof that Properly Discounted Present Value of Assets Vibrate Randomly.” Bell Journal of Economics 4: 369–374.Google Scholar
Samuelson, Paul. 2006. “Foreword.” In Davis, M. and Etheridge, A., eds., Louis Bachelier’s Theory of Speculation: The Origins of Modern Finance. Princeton: Princeton University Press, pp. vii–xi.Google Scholar
Sent, Esther-Mirjam. 1999. “The Randomness of Rational Expectations: A Perspective on Sargent’s Early Incentives.” The European Journal of the History of Economic Thought 6 (3): 439–471.Google Scholar
Schabacker, Richard W. 1930. Stock Market Theory and Practice. New York: B.C. Forbes Publishing Company.Google Scholar
Sharpe, William. 1964. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance 19 (3): 425–442.Google Scholar
Shiller, Robert. 2000. Irrational Exuberance. Princeton: Princeton University Press.Google Scholar
Stabile, Donald. 2005. Forerunners of Modern Financial Economics: A Random Walk in the History of Economic Thought. Cheltenham and Northampton: Edward Elgar.Google Scholar
Stigler, Stephen M. 1990. The History of Statistics: The Measurement of Uncertainty before 1900. Cambridge and London: Harvard University Press.Google Scholar
Teichmoeller, John. 1971. “A Note on the Distribution of Stock Price Changes.” Journal of the American Statistical Association 66 (334): 282–284.Google Scholar
Tobin, James. 1958. “Liquidity Preferences as Behavior towards Risk.” The Review of Economic Studies 25: 65–86.Google Scholar
Treynor, Jack. [1962] 1999. “Toward a Theory of Market Value of Risky Assets.” In Korajczyk, R. A., ed., Asset Pricing and Portfolio Performance: Models, Strategy and Performance Metrics. London: Risk Books, pp. 15–22.Google Scholar
Treynor, Jack, and Black, Fischer. 1973. “How to Use Security Analysis to Improve Portfolio Selection.” The Journal of Business 46 (1): 66–86.CrossRefGoogle Scholar
Walter, Christian. 2010a. “Le sida de la finance.” Cité 41: 89–98.Google Scholar
Walter, Christian. 2013. Le modèle de marche au hasard en finance. Paris: Economica.Google Scholar
Walter, Christian, ed. 2010b. Nouvelles normes financières. Paris: Springer.Google Scholar
Walter, Christian, and Brian, Éric, eds. 2008. Critique de la valeur fondamentale. Paris: Springer.Google Scholar
Working, Holbrook. 1934. “A Random-Difference Series for Use in the Analysis of Time Series.” Journal of the American Statistical Association 29: 11–24.Google Scholar