Arbitrage enforces a real link that anchors derivatives to underlying assets

Evidence

Index arbitrage thus has the potential to create an objective link between index futures and stocks. The theoretical value of an index future has nothing to do with opinions as to whether the price of stocks will rise or fall; like the theoretical value of an option, it is imposed by arbitrage. Arbitrage, therefore, had the potential to stop index futures being “a figment of Melamed’s imagination,” yoking them firmly to the prices of the underlying stocks. — Donald MacKenzie, An Engine, Not a Camera, 781

Categorization

• XREF: connects to: A derivative is a time-bounded bet, not a property claim — Mark Blyth, Austerity: The History of a Dangerous…, 87; The arbitrage argument produces the Black-Scholes partial differential equation. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 95; Market arbitrage requires only that investors prefer more wealth to less, not risk preferences — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 180 (+10 more)

Broader Connections

• Arbitrage linking futures prices to the index enabled portfolio insurance via cheap futures trading. #exemplifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 801
• Traders’ arbitrage activity made the pricing model appear empirically true #corroborates (0.85) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126
• Option theory infrastructure allows derivatives markets to exist at current scale #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1138
• Derivatives function by binding future prices to the present and blending forms of capital. #expands (0.80) — Andrew deWaard, Derivative Media, 170