Changes in the creditability of the Black-Scholes option pricing model due to financial turbulences

Abstract: This study examines whether the performance of the Black-Scholes model to price stock index options is influenced by the general conditions of the financial markets. For this purpose we calculated the theoretical values of 5814 options (3366 put option price observations and 2448 call option price observations) under the Black-Scholes assumptions. We compared these theoretical values with the real market prices in order to put the degree of deviations in two different time windows built around the bankruptcy of Lehman Brothers (September 15th 2008) to the test. We find clear evidences to state that the Black-Scholes model performed differently in the period after Lehman Brothers than in the period before; therefore we are able to blame this event for our findings.