Commodity Option Pricing Efficiency Before Black Scholes Merton

44 Pages Posted: 7 Oct 2019

See all articles by David Chambers

David Chambers

University of Cambridge - Judge Business School; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: September 2019


It is often thought that the arrival of the Black Scholes Merton (BSM) model of option pricing in the early 1970s allowed traders to understand how to price and value options with greater precision. Yet, our study suggests that interwar commodity option traders may have been able to intuit 'fair' value and to adjust their prices to changes in the market environment well before the advent of this innovative model. A scarcity of historical price data has limited empirical tests of option price efficiency well before BSM to prior studies of stock options in the 1870s and the early twentieth century which reach contrasting findings. This study deals with option pricing in a different market - commodities - during the interwar period. We conclude that option prices were closer to their BSM theoretical values than suggested by prior studies. Institutional differences between interwar commodity options market and stock option markets in the 1870s and the early twentieth century may partly account for this result. Furthermore, we find that interwar option prices were no more mispriced and were as sensitive to changes in volatility - the key valuation parameter in the BSM model - as in modern times.

Keywords: Black-Scholes, commodities, London Metals Exchange, Market Efficiency, Options, Performativity, Warrants

JEL Classification: G1, G2, N2

Suggested Citation

Chambers, David, Commodity Option Pricing Efficiency Before Black Scholes Merton (September 2019). CEPR Discussion Paper No. DP13975, Available at SSRN:

David Chambers (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44 (0)1223 339700 (Phone)

CEPR ( email )

United Kingdom

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