Other traders imitated LTCM’s successful arbitrage models and strategy
Evidence
One way to pursue a better understanding of the relationship between financial models and “reality” is by means of empirical research on arbitrage as market practice, and the case of LTCM is of interest from that viewpoint. A social process imitation was at the heart of LTCM’s crisis. The hedge fund and its predecessor group of bond-market arbitrageurs, led by LTCM’s founder John Meriwether at the investment bank Salomon Brothers, were extremely successful. That success led others to begin similar trading, to devote more capital to it, or (in the case of mortgage-backed securities) even to adjust the models they were using in order to bring them into harmony with the features that they inferred the model being used by Meriwether’s group must possess. — Donald MacKenzie, An Engine, Not a Camera, 155
Categorization
- SEED: Article angle: imitation of a successful quant strategy as the mechanism by which a model-engine alters markets — a concrete case of performativity via herd emulation rather than direct belief.
- XREF: Connects to George Soros-style reflexivity and to later work on crowding in quant strategies, e.g. Neil Chriss’s quant-fund-risk writing. — connects to: Traders’ arbitrage activity made the pricing model appear empirically true — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126; 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 (+6 more)
Broader Connections
- LTCM’s disclosed strategy led rivals to take similar arbitrage positions
#corroborates(1.00) — Donald MacKenzie, An Engine, Not a Camera, 1027 - Arbitrage strategies became consensus trades as hedge funds imitated LTCM
#corroborates(0.95) — Donald MacKenzie, An Engine, Not a Camera, 1029 - LTCM’s public success spawned imitator funds with eager capital
#corroborates(0.90) — Donald MacKenzie, An Engine, Not a Camera, 1025 - Imitation of LTCM created new correlations between unrelated arbitrage positions in 1998.
#corroborates(0.85) — Donald MacKenzie, An Engine, Not a Camera, 1228 - Option pricing converged on economic models through traders copying other users.
#exemplifies(0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 183