Derivative Pricing 60 Years before Black–Scholes: Evidence from the Johannesburg Stock Exchange

Abstract

We obtain daily data for warrants traded on the Johannesburg Stock Exchange between 1909 and 1922, and for a broker's call option quotes on stocks from 1908 to 1911. We use this new data set to test how close derivative prices are to Black-Scholes (1973) prices and to compute profits for investors using a simple trading rule for call options. We examine whether investors exercised warrants optimally and how they reacted to extensions of the warrants' durations. We show that long before the development of the formal theory, investors had an intuitive grasp of the determinants of derivative pricing. Copyright 2006 by The American Finance Association.

Was the emergence of the international gold standard expected? Evidence from Indian Government securities

“…Kairys and Valerio (1997) identify mispricing in New York the 1870s. Moore and Juh (2006) find on the other hand that option pricing at the beginning of the 20 th century was close to today's valuations. In our case, the features of the call render it extremely difficult to value even nowadays.…”

Option traders use (very) sophisticated heuristics, never the Black–Scholes–Merton formula

“…A study by Moore and Juh (2006) looks at warrants traded on the Johannesburg Stock Exchange as well as call options written on 112 stocks in the early 20th century. The authors find that the warrant prices were surprisingly accurately priced in the pre Black-Scholes era.…”

Learning and Equilibrium

“…Whatever method they used seems to have worked reasonably well, because examination of price data does not reveal large arbitrage opportunities (see e.g. Black & Scholes (1971) and Moore & Juh (2006). )…”