Academic arbitrageurs exploited the turn-of-the-year anomaly and eroded it

Evidence

Paul Samuelson suggests that its diminution was due to the fact that “pretty soon [after the effect’s identification] the assistant professors of finance were beginning to operate on this,” in other words to exploit it (Samuelson interview). The first of the index futures that began to be traded in the 1980s was the Kansas City Board of Trade’s futures on the Value Line index, which were launched in 1982. The Value Line index includes small firms, and each firm is given equal weight in the index’s composition (rather than weighting firms by their total market value), so the performance of small firms has a substantial effect on the level of the index. Every December, the “assistant professors of finance” would “buy the Kansas City futures” and “sell the S&P futures” (in the construction of the S&P 500 index firms are weighted by market capitalization, so the index reflects primarily the behavior of very large stocks). The “professors” would thus benefit from the turn-of-the-year anomaly, while being insulated from overall market fluctuations. — Donald MacKenzie, An Engine, Not a Camera, 436

Categorization

• XREF: The ‘assistant professors of finance’ exploiting an anomaly directly instantiates the book’s performativity thesis — market models changing the markets they model — and connects to Fama’s efficient market debate throughout the book.
• CANDY: The image of assistant professors of finance buying Kansas City futures every December to arbitrage the small-firm effect is a wonderfully concrete, shareable anecdote about academic finance leaking into practice.