Arbitrage is the chief channel achieving Barnesian performativity in finance
Evidence
Arbitrage is also a crucial mechanism by which finance theory affects markets. For example, the most important channel by which the Barnesian performativity of finance theory is achieved is the use of the theory to identify, exploit, and thus diminish discrepancies between “model” and “reality.” Examples include the “spreading” arbitrage in options markets that seems to have contributed to moving price patterns toward the Black-Scholes-Merton model, and the arbitrage-like exploitation of “anomalies” that helped to eliminate them. — Donald MacKenzie, An Engine, Not a Camera, 1209
Categorization
- DEFINE: States the concrete mechanism by which Barnerian performativity operates in finance: theory used to exploit and thereby erase the gap between model and reality.
- SEED: Article angle: the self-erasing nature of successful arbitrage — how exploiting an anomaly is the act that destroys it, a mechanism often missed by critics of efficient markets.
- XREF: connects to: Option pricing theory serves as the test case for performativity. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 124; Barnesian performativity means models create the price patterns they describe — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 148; Arbitrageurs deliberately conceal exploitable market inefficiencies because disclosure destroys them. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 457 (+4 more)
Broader Connections
- Traders’ arbitrage activity made the pricing model appear empirically true
#expands(0.90) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126 - Market microstructure shapes whether arbitrage opportunities persist or vanish
#qualifies(0.80) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94 - Arbitrage linking futures prices to the index enabled portfolio insurance via cheap futures trading.
#exemplifies(0.75) — Donald MacKenzie, An Engine, Not a Camera, 801