LTCM’s real trading closely resembled finance theory’s ideal arbitrage

Evidence

What is crucial is that LTCM conducted arbitrage, the central mechanism invoked by finance theory. To be sure, there are differences between the “arbitrage” that theory posits and arbitrage as market practice. However, some of what LTCM did was quite close to the paradigmatic arbitrages of finance theory. Aspects of its trading were similar to the arbitrage invoked in Modigliani and Miller’s classic proof, and LTCM’s option-market activities resembled the arbitrage that imposes Black-Scholes-Merton option pricing. — Donald MacKenzie, An Engine, Not a Camera, 154

Categorization

• DEFINE: Distinguishes theoretical arbitrage (as posited in finance theorems) from arbitrage as practiced, a key clarification for the performativity thesis.
• XREF: connects to: LTCM’s risky trading still approximated theory-defined arbitrage — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1002; LTCM’s trades were largely familiar plays already identified by academics — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1028; LTCM’s collapse was read as vindication of the efficient-market hypothesis — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1120

Broader Connections

• LTCM’s risky trading still approximated theory-defined arbitrage #corroborates (0.93) — Donald MacKenzie, An Engine, Not a Camera, 1002