Trading on a CAPM anomaly would have performed it away by bidding up prices

Evidence

Had the strategy of investing in leveraged low-beta portfolios been pursued on a large scale it might have had the performative effect of increasing the attractiveness of low-beta stocks, thus raising their prices, reducing the returns they provided, and minimizing the discrepancy between the model and the market. — Donald MacKenzie, An Engine, Not a Camera, 397

Categorization

• DEFINE: Textbook illustration of the performativity thesis: the arbitrageur’s own action is the mechanism that erases the deviation.
• SEED: Could build an article on ‘performativity of arbitrage’ — when exploiting an anomaly is the very thing that closes it, versus anomalies that persist because no one can exploit them.
• XREF: connects to: CAPM promised a simple tradeoff hidden beneath Wall Street’s apparent complexity — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 255; Market anomalies shrink once identified, partly because traders exploit them. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 433; Fama attributed anomalies to CAPM flaws, not market inefficiency. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 430 (+3 more)

Broader Connections

• Arbitrage erodes the profitability of exploiting the index inclusion anomaly #corroborates (0.95) — Donald MacKenzie, An Engine, Not a Camera, 462