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Derivative Pricing 60 Years before Black–Scholes: Evidence from the Johannesburg Stock Exchange
Author(s) -
MOORE LYNDON,
JUH STEVE
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.01012.x
Subject(s) - derivative (finance) , black–scholes model , stock exchange , financial economics , grasp , stock (firearms) , economics , econometrics , call option , business , finance , computer science , engineering , mechanical engineering , volatility (finance) , programming language
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.