Can the Black-Scholes model predict future stock prices?


Mitsuo Shiota


August 22, 2021

NHK and other media reported a supplement and cosmetics vendor listed on the first section of the Tokyo Stock Exchange demonstrated an air flight using biofuels it produced from euglena and used cook oil on June 29, 2021 (Japanese).

Nikkei didn’t report this demonstration, I guess, as Nikkei Business had reported those biofuels were made mainly from used cook oil on March 24, 2021 (Japanese, subscription required). But one of its commentators praised its CEO for his performance on July 28, 2021 (Japanese, subscription required).

Its vice-president had admitted those biofuels were made mainly from used cook oil, as the production cost from euglena were currently too high, on June 23, 2021 (Japanese).

Then, was that demonstration a company effort to shore up its stock prices? Did the CEO speak in good faith?

Although development of biofuels from algae, including euglena, face criticism (reported here and here), I can’t rule out their future possibilities. So I briefly read the books of both its CEO and CTO to check their good faith, and found some annoying writings.

The CEO wrote he and the CTO won stock investment contests both in Sky Perfect TV and TV Tokyo using the Black-Scholes model in their university days in his book (Japanese). He wrote the CTO could calculate the proper stock prices using the Black-Scholes model, and found the undervalued stocks. It is not possible, as the Black-Scholes model is a mathematical model for pricing an options contract. Did the CEO misunderstand the CTO doing?

The CTO wrote he used the differential equation, on which the Black-Scholes model relies, in his book publised by Nikkei BP. That equation must be here. For call option price, substitute C(S, T) = max(S - K, 0) in the last differential equation, and we get the Black-Scholes model. For stock price, substitute C = S in the last differential equation, and we get the identity equation rS - rS = 0. I don’t know how this differential equation helped the CTO win the stock investment contest.