Edited by Jan Toporowski and Jo Michell
Chapter 35: Option pricing models
Mainstream financial theory suffers from the characteristic analytical weaknesses of its neoclassical economic foundations. Its central results are defined and functionally derived in relation to ahistorical and asocial market ‘equilibria’, conceptualized with systematic reference to neither the agencies nor regulating forces that may create and define them. Its approach to knowledge offers little insight into how economic actors and observers may each learn about economic circumstances. And it tends to conflate theorization with mathematical formalization, with a notable lack of attention to the correspondence of its premises and axioms with economic behaviour and structures under analysis. The potential difficulties arising from these shortcomings are manifold. This brief chapter discusses some of those as evident in influential theories of option pricing.1 Like the efficient markets hypothesis (EMH), option pricing models rely upon a problematic, neoclassical conceptualization of the exercise of arbitrage. Competitive financial markets are held to offer no opportunity for systematic, risk-adjusted gains by exploiting misalignments in asset prices.
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