LTCM’s risky trading still approximated theory-defined arbitrage

Evidence

Clearly, LTCM’s trading involved risk. It is therefore, tempting to conclude that what LTCM did although it was unquestionably “arbitrage” in financial-market usage of the term was not arbitrage as it is conceived within finance theory. However, LTCM’s index option positions were quite close to the arbitrage that finance theory posits as imposing Black-Scholes option pricing. — Donald MacKenzie, An Engine, Not a Camera, 1002

Categorization

• DEFINE: Distinguishes market-usage ‘arbitrage’ from the theory-conceived arbitrage that enforces pricing models.
• XREF: connects to: LTCM’s real trading closely resembled finance theory’s ideal arbitrage — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 154; Convergence arbitrage guarantees profit if held to maturity — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 983