Browsing by Author "Redroban, Shirley"

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    On the performance of the Black and Scholes options pricing formulas during the subprime and Covid-19 crises
    (2021) Redroban, Shirley; Cifuentes, Arturo
    We examine the performance of the Black-Scholes (B-S) formulas around (i.e., before, during and after) two periods of market stress: the subprime crisis (October, 2008) and the onset of the Covid-19 pandemic (March, 2020). This is interesting for two reasons. First, most studies regarding the accuracy of the B-S formulas have been done under regular or normal market conditions (granted, a fuzzy concept), not under conditions of severe market stress. And second, these two crises are quite different in nature. The subprime crisis was generated within a specific segment of the capital markets and affected only some sectors of the economy; the Covid-19 crisis was due to an external shock and still continues to have a much wider impact. We find, in agreement with previous studies under different circumstances, that the accuracy of these formulas is very poor. Moreover, we find that the degree of mispricing, which is significant and in many cases exceed 100%, is manifest in both crises, and in all scenarios analyzed.