The Hidden Value in the “Black Swan” Pandemic Synergistic Externalities Creates Opportunity Value Reversing Application of Black-Scholes Option Pricing Model (BSOPM)

Abstract: The worldly pandemic crisis creates unprecedented external value effects. These effects result in unexpected economic externalities which generate unexpected synergy value in investment valuation. 2020 global pandemic is an extraordinary example of such synergistic externalities.

We aim to conduct research in the reversing application of the Black-Scholes Option Pricing Model (BSOPM). In the past, BSOPM failed when extreme unexpected events occurred. The normality assumption of the Black-Scholes model does not capture extreme movements. However, the reversed application and empirical testing results demonstrate the greater volatility, the greater the return. It is axiomatic that risk and reward are positively correlated, even when “black swan” events occur. This is unconventional and contradicted with valuation intuition. Technology has greatly advanced. The information travels in nanoseconds hence breaking the “norm”. Is it possible the “Black Swan” creates values through the exceedingly high fluctuation?

In this paper, we will evaluate the hidden value in the “Black Swan” — that is, examine the pandemic global impact (synergistic externalities) and how this disaster creates opportunity value. We target to research on the reversing application of Black-Scholes Option Pricing Model (BSOPM) in such an evaluation and recommend how to utilize the BSOPM model-thinking to strategize the organization’s agility to anticipate the “unexpected”.

Key words: heterodox valuation, economics

JEL code: C