The two hypotheses yield testably distinct predictions for similar spreads and implied volatilities.

Evidence

In cases of two types, however, the predictions of the two explanations differ. Type one is cases in which there is a range of similar spreads or implied volatilities in only some of which LTCM had positions. The superportfolio explanation would then predict greater increases in the spreads or implied volatilities in which LTCM had positions than in those in which it did not (assuming that, as was in general the case, LTCM held the less liquid instrument or was short volatility, in other words had sold the options in question). If the spreads or implied volatilities genuinely are similar, the flight-to-quality explanation would, in contrast, predict similar movements of them all. — Donald MacKenzie, An Engine, Not a Camera, 1077

Categorization

• XREF: connects to: Testing CAPM substituted realized returns for expected returns via rational-expectations assumptions. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 111; Risk attitude determines how an investment’s value differs from its expected payoff — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 534; Pricing under a risk-neutrality fiction yields the same option price as arbitrage pricing. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1283

Broader Connections

• Pricing under a risk-neutrality fiction yields the same option price as arbitrage pricing. #exemplifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1283
• Testing CAPM substituted realized returns for expected returns via rational-expectations assumptions. #complicates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 111
• Risk attitude determines how an investment’s value differs from its expected payoff #expands (0.72) — Donald MacKenzie, An Engine, Not a Camera, 534