The Black-Scholes-Merton model was not transcended, but supplemented. It was brilliant, productive theoretical work. But was it empirically valid? After constructing their formula for the pricing of call options (equation 2 in appendix D), Black and Scholes tested its empirical validity for the ad hoc New York options market, using a broker's diaries in which were "recorded all option contracts written for his customers." They found only an approximate fit: "in general writers [the sellers of options] obtain favorable prices, and ... there tends to be a systematic mispricing of options as a function of the variance of returns of the stock" (Black and Scholes 1972, pp.

Donald MacKenzie, An Engine, Not a Camera, loc. 625