An empirical investigation of the Black-Scholes model: evidence from the Australian Stock Exchange

Authors

Scott McKenzie, University of Wollongong, Australia
Dionigi Gerace, University of Wollongong, Australia
Zaffar Subedar, University of Wollongong, Australia

Abstract

This paper evaluates the probability of an exchange traded European call option being exercised on the ASX200 Options Index. Using single-parameter estimates of factors within the Black-Scholes model, this paper utilises qualitative regression and a maximum likelihood approach. Results indicate that the Black-Scholes model is statistically significant at the 1% level. The results also provide evidence that the use of implied volatility and a jump-diffusion approach, which increases the tail properties of the underlying lognormal distribution, improves the statistical significance of the Black-Scholes model.

Recommended Citation

McKenzie, Scott; Gerace, Dionigi; and Subedar, Zaffar, An empirical investigation of the Black-Scholes model: evidence from the Australian Stock Exchange, Australasian Accounting, Business and Finance Journal, 1(4), 2007, 71-82. doi:10.14453/aabfj.v1i4.5