Theory vs. Practice: Revisiting the Applicability of CAPM and Black-Scholes in Real-World Markets

This study is an empirical assessment of the Capital Asset Pricing Model (CAPM), the BlackScholes option pricing model (Black-Scholes), and the PutCall Parity principle (PCP)in China's A-share equity market and the U.S. derivatives market. Using data from 2020 to 2023, the research will investigate whether these classical models can reliably describe real-world market behaviors. Precisely, the low R obtained from CAPM analysis of Kweichow Moutai and the CSI 300 Index suggests that the model is not sufficient to explain market dynamics. In the meantime, beta coefficients in the standard CAPM are negative and statistically insignificant, indicating the failure of single-factor risk measures to capture the market dynamics properly. For derivatives, testing of European options on AMZN and SPY shows that the BlackScholes model does have directionally consistent pricing. However, systematic deviations and volatility smiles indicate that, in a real market, there are persistent and unavoidable violations of constant volatility assumptions. Also, the putcall parity principle, although generally held, has small but persistent deviations caused by transaction costs, liquidity constraints, and other market frictions. All in all, findings show that the empirical accuracy of CAPM, BlackScholes and Put-Call Parity is limited by market structure, behavioral factors, and unrealistic assumptions. This study further demonstrates the need for multifactor modeling approaches that could enhance the validity of asset pricing models.