Tests of Market Efficiency of the Chicago Board Options Exchange

Abstract

Although options have been traded for many centuries,' they are getting increasing attention both in the capital market as an investment tool and in the development of the theory of capital-assets valuations.2 In this work, I investigate the pricing mechanism of call options written on stocks and test the efficiency of a market in which they are traded, the newly created market, the Chicago Board Options Exchange (CBOE). The efficiency of the CBOE is to be tested against a specific model for option pricing developed by Black and Scholes.3 This model was selected because of its attractiveness on theoretical grounds4 and its consistency with the well-known capital-asset-pricing model (CAPM) of Sharpe and Lintner.5 An American call option is a right to buy a specific quantity of a given security at a fixed, predetermined price (the striking price) during a