Imitation of LTCM created new correlations between unrelated arbitrage positions in 1998.

Evidence

“Crowding” is what appears to have taken place in global arbitrage in the 1990s. As discussed in chapter 8, it seems to have been driven at least in part by imitation of Long-Term Capital Management. The consequence was the sudden appearance in the crisis of 1998 of substantial correlations between arbitrage positions that had little or nothing in common at the level of economic fundamentals and which previously had manifested very low correlations. — Donald MacKenzie, An Engine, Not a Camera, 1228

Categorization

• XREF: Core evidence for the performativity thesis — imitation produced market correlations that fundamental analysis could not explain. — connects to: Other traders imitated LTCM’s successful arbitrage models and strategy — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 155; LTCM’s disclosed strategy led rivals to take similar arbitrage positions — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1027; Arbitrage strategies became consensus trades as hedge funds imitated LTCM — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1029 (+3 more)

Broader Connections

• Traders’ arbitrage activity made the pricing model appear empirically true #expands (0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126