Even certain knowledge of a future crash does not guarantee arbitrage profit.

Evidence

However, two partners in LTCM independently pointed out to me the impossibility of making arbitrage profits from exaggerated valuations. Suppose they had been vouchsafed a little peek into the future: that they knew, with absolute certainty, that at a particular point in time the stock price of company X would be zero. Could they now, they asked me, make money with certainty from this knowledge? Their question was rhetorical; they knew the answer to be “No.” Of course, they could sell the stock short. If they could hold their position until the stock price became zero, they could indeed profit handsomely. But if in the interim the price continued to rise, they could still exhaust their capital and be forced to liquidate at a loss. — Donald MacKenzie, An Engine, Not a Camera, 1215

Categorization

• CANDY: A vivid, memorable thought-experiment — certainty of future value still can’t be arbitraged profitably — great elevator material.
• SHARE: Worth sending to anyone in finance or quant circles who trots out ‘efficient markets’ uncritically.
• XREF: connects to: Limited arbitrage capital can force abandonment of even certain-profit trades — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1217; Relative price confirmations depend on arbitrageur positioning, not just quality flight. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1083

Broader Connections

• Limited arbitrage capital can force abandonment of even certain-profit trades #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 1217
• Relative price confirmations depend on arbitrageur positioning, not just quality flight. #complicates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1083