Convergence arbitrage guarantees profit if held to maturity

Evidence

Indeed, a swap-spread position such as that described in appendix G can be held until the bond matures and the swap expires. That feature was taken to be the essence of convergence arbitrage: if held to maturity, a convergence arbitrage position has to make a profit, whatever the market’s fluctuations along the way. — Donald MacKenzie, An Engine, Not a Camera, 983

Categorization

• DEFINE: Defines convergence arbitrage as a position that is guaranteed profitable at maturity, which is the deep premise LTCM’s model rested on and which failed in practice.
• XREF: connects to: Limited arbitrage capital can force abandonment of even certain-profit trades — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1217; LTCM’s risky trading still approximated theory-defined arbitrage — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1002; Market microstructure shapes whether arbitrage opportunities persist or vanish — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94 (+1 more)

Broader Connections

• Limited arbitrage capital can force abandonment of even certain-profit trades #qualifies (0.82) — Donald MacKenzie, An Engine, Not a Camera, 1217
• LTCM’s risky trading still approximated theory-defined arbitrage #qualifies (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1002
• Market microstructure shapes whether arbitrage opportunities persist or vanish #qualifies (0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94