Constrained arbitrage allows finance-theory models to diverge from actual prices.
Evidence
If, in contrast, the potential for arbitrage is constrained, then discrepancies between finance-theory models and “reality” may persist, and the effects on patterns of prices of the phenomena pointed to by behavioral finance may not be eliminated. — Donald MacKenzie, An Engine, Not a Camera, 1213
Categorization
- XREF: connects to: Finance derives prices for new objects from unrelated market prices — Ève Chiapello, Financialisation of Valuation, 39; Market arbitrage requires only that investors prefer more wealth to less, not risk preferences — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 180; The M-M debate hinged on whether arbitrage could overcome institutional restrictions — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 193 (+10 more)
Broader Connections
- Traders’ arbitrage activity made the pricing model appear empirically true
#qualifies(0.85) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126 - Modern options pricing derives from arbitrage logic, not directional beliefs.
#qualifies(0.82) — Donald MacKenzie, An Engine, Not a Camera, 1454 - Arbitrage enforces a real link that anchors derivatives to underlying assets
#qualifies(0.80) — Donald MacKenzie, An Engine, Not a Camera, 781 - The arbitrage argument produces the Black-Scholes partial differential equation.
#qualifies(0.80) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 95 - Pricing under a risk-neutrality fiction yields the same option price as arbitrage pricing.
#qualifies(0.78) — Donald MacKenzie, An Engine, Not a Camera, 1283