An Engine, Not a Camera How Financial Models Shape Markets Donald MacKenzie MacKenzie Donald An Engine, Not a Camera Inside Technology edited by Wiebe E Bijker, W Bernard Carlson, and Trevor Pinch A list of the series will be found on page 369 An Engine, Not a Camera How Financial Models Shape Markets Donald MacKenzie The MIT Press Cambridge, Massachusetts London, England © 2006 Massachusetts Institute of Technology All rights reserved No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher This book does not constitute financial advice, and it is sold with the understanding that neither the author nor the publisher is engaged in rendering investing, legal, accounting, or other professional service If investment advice or other expert assistance is required, the services of a competent professional person should be sought MIT Press books may be purchased at special quantity discounts for business or sales promotional use For information, please email special_sales@mitpress.mit.edu or write to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge, MA 02142 Set in Baskerville by SNP Best-set Typesetter Ltd., Hong Kong Printed and bound in the United States of America Library of Congress Cataloging-in-Publication Data MacKenzie, Donald A An engine, not a camera : how financial models shape markets / Donald MacKenzie p cm — (Inside technology) Includes bibliographical references and index ISBN 0-262-13460-8 Capital market—Mathematical models Derivative securities—Mathematical models Financial crises—Mathematical models Financial crises—Case studies I Title II Series HG4523.M24 2006 10 332'.01'5195—dc22 2005052115 to Iain Contents Acknowledgements ix Performing Theory? Transforming Finance 37 Theory and Practice 69 Tests, Anomalies, and Monsters 89 Pricing Options 119 Pits, Bodies, and Theorems 143 The Fall 179 Arbitrage 211 Models and Markets 243 Appendix A An Example of Modigliani and Miller’s “Arbitrage Proof ” of the Irrelevance of Capital Structure to Total Market Value 277 viii Contents Appendix B Lévy Distributions 279 Appendix C Sprenkle’s and Kassouf ’s Equations for Warrant Prices 281 Appendix D The Black-Scholes Equation for a European Option on a NonDividend-Bearing Stock 283 Appendix E Pricing Options in a Binomial World Appendix F Repo, Haircuts, and Reverse Repo 285 289 Appendix G A Typical Swap-Spread Arbitrage Trade Appendix H List of Interviewees 293 Glossary 297 Notes 303 Sources of Unpublished Documents References 333 Series List 369 Index 371 331 291 Acknowledgements To research and to write a book is to incur a multitude of debts of gratitude For an academic, time is often the resource in shortest supply The time needed to write this book and to complete the research that underpins it was provided by a professorial fellowship awarded by the U.K Economic and Social Research Council (RES-051-27-0062) The funds for the trips required by all but the most recent interviews were provided by Edinburgh University and especially by the Interdisciplinary Research Collaboration on the Dependability of Computer-Based Systems (DIRC), which is itself supported by a grant awarded by the U.K Engineering and Physical Sciences Research Council (GR/N13999) Behind that bald statement lies the generosity of DIRC’s overall director, Cliff Jones, and of the leaders of its Edinburgh center, Stuart Anderson and Robin Williams, in regarding an offbeat topic as relevant to DIRC Robin, in particular, has been a good friend both to me and to this project Ultimately, though, money was less important as a source of support than people Moyra Forrest provided me, promptly and cheerfully, with the vast majority of the hundreds of documents that form this book’s bibliography Margaret Robertson skillfully transcribed the bulk of the interviews: as anyone who has done similar work knows, the quality of transcription is a key matter I am always amazed by Barbara Silander’s capacity to turn my voluminous, messy, handwritten drafts, heavily edited typescript, dictated passages, and file cards into an orderly word-processed text and reference list: I could not have written the book without her I have also been lucky enough to find colleagues who have shared my enthusiasm for “social studies of finance.” Yuval Millo was there at my project’s inception, and has contributed to it in a multitude of ways James Clunie, Iain Hardie, Dave Leung, Lucia Siu, and Alex Preda have now joined me in the Edinburgh group, and it is my enormous good fortune to have them as collaborators 364 References Stambaugh, Robert F 1982 “On the Exclusion of Assets from Tests of the TwoParameter Model: A Sensitivity Analysis.” Journal of Financial Economics 10: 237–268 Stewart, James B., and Daniel Hertzberg 1987 “How the Stock Market Almost Disintegrated a Day after the Crash.” Wall Street Journal, November 20 Stigler, George J 1988 Memoirs of an Unregulated Economist Basic Books Stiglitz, Joseph E 1990 “Symposium on Bubbles.” Journal of Economic Perspectives 4, no 2: 13–18 Stigum, Marcia 1989 The Repo and Reverse Markets Dow Jones–Irwin Stoll, Hans R 1969 “The Relationship between Put and Call Option Prices.” Journal of Finance 24: 801–824 Stratonovich, R.L 1966 “A New Representation for Stochastic Integrals and Equations.” Society for Industrial and Applied Mathematics Journal of Control 4: 362–371 Stroock, Daniel W., and S.R.S Varadhan, eds 1987 Kiyosi Itô: Selected Papers Springer Summers, Lawrence H 1985 “On Economics and Finance.” Journal of Finance 40: 633–635 Swan, Edward J 2000 Building the Global Market: A 4000 Year History of Derivatives Kluwer Swedberg, Richard 2003 Principles of Economic Sociology Princeton University Press Taleb, Nassim 1998 “How the Ought Became the Is.” Futures and OTC World, BlackScholes-Merton Supplement: 35–36 Tamarkin, Bob 1993 The Merc: The Emergence of a Global Financial Powerhouse HarperCollins Thaler, Richard H 2000 “From Homo Economicus to Homo Sapiens.” Journal of Economic Perspectives 14, no 1: 133–141 Thomas, Nicholas 1991 Entangled Objects: Exchange, Material Culture, and Colonialism in the Pacific Harvard University Press Thompson, Rex 1978 “The Information Content of Discounts and Premiums on Closed-End Fund Shares.” Journal of Financial Economics 6: 151–186 Thorp, Edward O 1961 “A Favorable Strategy for Twenty-One.” Proceedings of the National Academy of Sciences 47: 110–112 Thorp, Edward O 1966 Beat the Dealer Vintage Thorp, Edward O 1969 “Optimal Gambling Systems for Favorable Games.” Review of the International Statistical Institute 37: 273–281 Thorp, Edward O 1973 “Extensions of the Black-Scholes Option Model.” In Proceedings of the 39th Session of the International Statistical Institute, Vienna References 365 Thorp, Edward O 2002 “What I Knew and When I Knew It: Part 1.” Wilmott, September: 44–45 Thorp, Edward O., and Sheen T Kassouf 1967 Beat the Market: A Scientific Stock Market System Random House Timmermann, Allan 1995 “Scales and Stock Markets.” Nature 376 ( July 6): 18–19 Tobin, James 1958 “Liquidity Preference as Behavior towards Risk.” Review of Economic Studies 25: 65–86 Tobin, James 1995 “James Tobin.” In Lives of the Laureates: Thirteen Nobel Economists, ed W Breit and R Spencer MIT Press Toft, K.B., and B Prucyk 1997 “Options on Leveraged Equity: Theory and Empirical Tests.” Journal of Finance 52: 1151–80 Treynor, Jack L 1961 “Market Value, Time, and Risk.” Treynor papers Treynor, Jack L 1962 “Toward a Theory of Market Value of Risky Assets.” Black papers, box 56, Treynor file Treynor, Jack L 1963 “Implications for the Theory of Finance.” Treynor papers Treynor, Jack L 1965 “How to Rate Management of Investment Funds.” Harvard Business Review 43: 63–75 Treynor, Jack L 1981 “Krapp’s Last Tape.” Financial Analysts Journal 37 ( July–August): 10 Treynor, Jack L 1999 “Toward a Theory of Market Value of Risky Assets.” In Asset Pricing and Portfolio Performance: Models, Strategy and Performance Metrics, ed R Korajczyk Risk Books Treynor, Jack L., and Fischer Black 1976 “Corporate Investment Decisions.” In Modern Developments in Financial Management, ed S Myers Praeger Treynor, Jack L., and Richard F Vancil 1956 Machine Tool Leasing Management Analysis Center Triffin, Robert 1940 Monopolistic Competition and General Equilibrium Theory Harvard University Press Tudball, Dan 2002 “In for the Count.” Wilmott, September: 24–35 Valdés, Juan Gabriel 1995 Pinochet’s Economists: The Chicago School in Chile Cambridge University Press Vasicek, Oldrich 1977 “An Equilibrium Characterization of the Term Structure.” Journal of Financial Economics 5: 177–188 Vertin, James R 1974 “The State of the Art in our Profession.” Journal of Portfolio Management Fall: 10–12 366 References Voorhees, Mark 1988 “Can Portfolio Insurance Make a Comeback?” Institutional Investor, January: 57–58 Wallace, Anise 1980 “Is Beta Dead?” Institutional Investor July: 23–30 Walsh, J L 1949 [Review of Zipf (1949).] Scientific American, August: 56–58 Walter, James E., and Michael R Milken 1973 Managing the Corporate Financial Structure Working Paper 26–73, Rodney L White Center for Financial Research, Wharton School of Business, University of Pennsylvania Weber, Max 2000a “Stock and Commodity Exchanges [Die Börse (1894)].” Theory and Society 29: 305–338 Weber, Max 2000b “Commerce on the Stock and Commodity Exchanges [Die Börsenverkehr].” Economy and Society 29: 339–371 Weinstein, Meyer H 1931 Arbitrage in Securities Harper Weintraub, E Roy 2002 How Economics became a Mathematical Science Duke University Press Welles, Chris 1971 “The Beta Revolution: Learning to Live with Risk.” Institutional Investor, September: 21–27, 52–58 and 62–64 Welles, Chris 1977 “Modern Portfolio Theory: Reprogramming the Money Manager.” Institutional Investor, April: 35–52 Welles, Chris 1978 “Who Is Barr Rosenberg? And What the Hell Is He Talking About?” Institutional Investor, May: 59–66 Wendt, Lloyd 1982 The Wall Street Journal: The Story of Dow Jones and the Nation’s Business Newspaper Rand McNally Weston, J Fred 1966 The Scope and Methodology of Finance Prentice-Hall Weston, J Fred 1989 “What MM Have Wrought.” Financial Management 18, no 2: 29–37 White, Harrison C 1981 “Where Do Markets Come From?” American Journal of Sociology 87: 517–547 White, Harrison C 2001 Markets from Networks Princeton University Press Whitley, Richard 1986a “The Rise of Modern Finance Theory: Its Characteristics as a Scientific Field and Connections to the Changing Structure of Capital Markets.” Research in the History of Economic Thought and Methodology 4: 147–178 Whitley, Richard 1986b “The Transformation of Business Finance into Financial Economics: The Roles of Academic Expansion and Changes in U.S Capital Markets.” Accounting, Organizations and Society 11: 171–192 Widick, Richard 2003 “Flesh and the Free Market: (On Taking Bourdieu to the Options Exchange).” Theory and Society 32: 677–723 References 367 Wiener, Norbert 1923 “Differential-Space.” Journal of Mathematical Physics 2: 131–174 Wiese, Robert G 1930 “Investing for True Values.” Barron’s, September 8: Wiesenberger, Arthur 1942 Investment Companies and their Securities A Wiesenberger Williams, John Burr 1938 The Theory of Investment Value Harvard University Press Wilmott, Paul 1998 Derivatives: The Theory and Practice of Financial Engineering Chichester: Wiley Winner, Langdon 1977 Autonomous Technology: Technics-out-of-Control as a Theme in Political Thought MIT Press Woodward, Bob 2001 Maestro: Greenspan’s Fed and the American Boom Pocket Books Working, Holbrook 1934 “A Random-Difference Series for Use in the Analysis of Time Series.” Journal of the American Statistical Association 29: 11–24 Working, Holbrook 1958 “A Theory of Anticipating Prices.” American Economic Review 48: 188–199 Wurgler, Jeffrey, and Ekaterina Zhuravskaya 2002 “Does Arbitrage Flatten Demand Curves for Stocks?” Journal of Business 75: 583–608 Yonay, Yuval P 1994 “When Black Boxes Clash: Competing Ideas of What Science is in Economics, 1924–39.” Social Studies of Science 24: 39–80 Yonay, Yuval P 1998 The Struggle over the Soul of Economics: Institutional and Neoclassical Economists in American between the Wars Princeton University Press Yonay, Yuval P., and Daniel Breslau 2001 Economic Theory and Reality: A Sociological Perspective on Induction and Inference in a Deductive Science Typescript Zajac, Edward J., and James D Westphal 2004 “The Social Construction of Market Value: Institutionalization and Learning Perspectives on Stock Market Reactions.” American Sociological Review 69: 433–457 Zaloom, Caitlin 2003 “Ambiguous Numbers: Trading Technologies and Interpretation in Financial Markets.” American Ethnologist 30: 258–72 Zaloom, Caitlin 2004 “The Productive Life of Risk.” Current Anthropology 19: 365–391 Zelizer, Viviana A Rotman 1979 Morals and Markets: The Development of Life Insurance in the United States Columbia University Press Zimmermann, Heinz, and Wolfgang Hafner n.d Professor Bronzin’s Option Pricing Models (1908) Typescript Zipf, George K 1949 Human Behavior and the Principle of Least Effort: An Introduction to Human Ecology Addison-Wesley Zolotarev, V.M 1986 One-Dimensional Stable Distributions American Mathematical Society 368 References Zorn, Dirk M 2004 “Here a Chief, There a Chief: The Rise of the CFO in the American Firm.” American Sociological Review 69: 345–364 Zorn, Dirk M., and Frank Dobbin 2003 “Too Many Chiefs? How Financial Markets Reshaped the American Firm.” Paper presented to Conference on Social Studies of Finance, Konstanz Zuckerman, Ezra W 2004 “Towards the Social Reconstruction of an Interdisciplinary Turf War.” American Sociological Review 69: 458–465 Inside Technology edited by Wiebe E Bijker, W Bernard Carlson, and Trevor Pinch Janet Abbate, Inventing the Internet Charles Bazerman, The Languages of Edison’s Light Marc Berg, Rationalizing Medical Work: Decision-Support Techniques and Medical Practices Wiebe E Bijker, Of Bicycles, Bakelites, and Bulbs: Toward a Theory of Sociotechnical Change Wiebe E Bijker and John Law, editors, Shaping Technology/Building Society: Studies in Sociotechnical Change Stuart S Blume, Insight and Industry: On the Dynamics of Technological Change in Medicine Pablo J Boczkowski, Digitizing the News: Innovation in Online Newspapers Geoffrey C Bowker, Memory Practices in the Sciences Geoffrey C Bowker, Science on the Run: Information Management and Industrial Geophysics at Schlumberger, 1920–1940 Geoffrey C Bowker and Susan Leigh Star, Sorting Things Out: Classification and Its Consequences Louis L Bucciarelli, Designing Engineers H M Collins, Artificial Experts: Social Knowledge and Intelligent Machines Paul N Edwards, The Closed World: Computers and the Politics of Discourse in Cold War America Herbert Gottweis, Governing Molecules: The Discursive Politics of Genetic Engineering in Europe and the United States Gabrielle Hecht, The Radiance of France: Nuclear Power and National Identity after World War II Kathryn Henderson, On Line and On Paper: Visual Representations, Visual Culture, and Computer Graphics in Design Engineering Anique Hommels, Unbuilding Cities: Obduracy in Urban Sociotechnical Change Christophe Lécuyer, Making Silicon Valley: Innovation and the Growth of High Tech, 1930–1970 David Kaiser, editor, Pedagogy and the Practice of Science: Historical and Contemporary Perspectives Peter Keating and Alberto Cambrosio, Biomedical Platforms: Reproducing the Normal and the Pathological in Late-Twentieth-Century Medicine Eda Kranakis, Constructing a Bridge: An Exploration of Engineering Culture, Design, and Research in Nineteenth-Century France and America Pamela E Mack, Viewing the Earth: The Social Construction of the Landsat Satellite System Donald MacKenzie, Inventing Accuracy: A Historical Sociology of Nuclear Missile Guidance Donald MacKenzie, Knowing Machines: Essays on Technical Change Donald MacKenzie, Mechanizing Proof: Computing, Risk, and Trust Donald MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets 370 Maggie Mort, Building the Trident Network: A Study of the Enrollment of People, Knowledge, and Machines Nelly Oudshoorn and Trevor Pinch, editors, How Users Matter: The Co-Construction of Users and Technology Paul Rosen, Framing Production: Technology, Culture, and Change in the British Bicycle Industry Susanne K Schmidt and Raymund Werle, Coordinating Technology: Studies in the International Standardization of Telecommunications Charis Thompson, Making Parents: The Ontological Choreography of Reproductive Technology Dominique Vinck, editor, Everyday Engineering: An Ethnography of Design and Innovation Index Agency theory, 261 Alchian, A., 52–55 Allen, R., 61, 62 Alpha, 108, 109, 115, 116 American National Bank, 85, 99 American options, 159 American Stock Exchange, 170 American Telephone and Telegraph, 86 Anomalies, 23, 30, 95–105, 255, 256, 268 Arbit, H., 84 Arbitrage, 32–35, 211–242 Arizona Stock Exchange, 199 Arrow, K., Arthur D Little, Inc., 127–130, 250 Associates in Finance, 130 Atkinson, T., 254 Austin, J., 16 Autoquote, 169, 201, 204, 265 Bach, L., 39 Bachelier, L., 59, 60, 63, 106, 120 Baker, W., 155, 156, 264, 265 Banz, R., 96–100, 267 Barnes, B., 19, 33, 97 Barr Rosenberg and Associates (BARRA), 83 Bates, D., 204–208 Batterymarch Financial Management, 85 Baumol, W., 149, 252 Bear Stearns, 235, 236 Becker Securities, 82–87 Bergstrom, G., 83, 84 Bernstein, P., 28, 38, 80, 82 Beta, 29, 53, 54, 57, 58, 83, 91, 92, 251, 252, 297 Beunza, D., 224, 271 Black, F., 6, 24, 27, 90–92, 127–130, 137, 160–164, 246–249, 256, 265 Black-Scholes equation, 6, 7, 31, 127, 132, 135, 137, 248, 249, 283, 284 Black-Scholes-Merton model, 6, 20, 21, 32, 33, 136–142, 157–159, 162–166, 201, 202, 245, 256–259, 271, 288 Blattberg, R., 114 Blinder, A., 24, 25, 261 Bloor, D., 107, 108 Bonds, 37, 41, 42, 74, 212–219, 297, 302 convertible, 215, 298 hurricane, 234 junk, 184, 254 ruble, 35, 225, 229, 230 Boness, A., 123, 132, 133 Borsellino, L., 198 Bourbaki, N., 106 Brady Commission, 190–194 Brennan, M., 179 Bretton Woods Agreement, 145, 146 Bronzin, V., 120 Brownian motion, 60, 63, 106, 297 Bruegger, U., 242 Buffett, W., 76–78 Burns, A., 148 Bushels, 14 Business schools, 5, 28, 37–39, 72–75, 243, 244, 261, 262 372 Index Calculators, 159, 160 Caliskan, K., 21 Callon, M., 12–16, 263 Calls, 5, 6, 119, 121, 167, 207, 298 Capital Asset Pricing Model (CAPM), 11, 23, 28, 31, 54–58, 66, 67, 82, 87–94, 116, 129, 130, 134, 245–248, 254, 255, 298 Carnegie Institute of Technology, 38, 39, 72 Cascades, 243–246 Casey, W., 150, 265 Casino games, 124 Castelli, C., 119, 120 Cauchy distribution, 109 Center for Research in Security Prices, 23, 24, 69, 89, 90, 104, 249 Chaos, 112, 117 Chartism, 75, 76 Chicago Board of Trade, 1, 13, 143–148, 170 Chicago Board Options Exchange, 6, 150, 151, 155, 158, 167, 170, 188, 200, 201, 206, 265 Chicago Boys, 16 Chicago Mercantile Exchange, 1–4, 13, 143, 148, 151, 173, 188, 189 Chile, 16 Clearing, 2, 174, 298 Clinton, H., 143 Cohen, M., 149, 150 Collective action, 150–156, 263, 264 Collins, H., 22 Commodity Futures Trading Commission, 171–173 Computers, 7, 69, 159, 160, 201 Contango, 120 Continental Illinois Bank, Continuous-time models, 59, 122, 134, 135 Convergence, 228, 237 Convergence Asset Management, 227 Cooper, B., 39 Cootner, P., 149 Corners, 15, 216 Corporations, 37, 73, 74, 260–262 Counterperformativity, 17, 19, 33, 34, 190, 209, 210, 259, 260 Cowles, A., III, 46, 95 Cowles Commission for Research in Economics, 45, 46, 51 Cox, J., 139 Cox-Ross-Rubinstein model, 20, 31, 139–141, 175, 176, 181, 186, 187, 201, 204, 211, 268–272, 285–288, 297 Cronon, W., 13, 14 Crowding, 272 Debreu, G., De la Vega, J., 119 Delta hedging, 131, 207 Demon of Chance, 61, 62 Derivatives, 4, 32, 144, 147, 151, 250–252, 257, 262, 263, 274, 298 Derman, E., 136, 137, 243 Designated Order Turnaround system, 185–187, 193 Dewing, A., 37, 38, 67, 70 Dimensional Fund Advisors, 99–102, 217, 267 Dividend discount model, 46, 47 Dodd, D., 76, 77 Dotcom boom, 269, 272 Dow, C., 75, 76 Dow Jones, 2, 172, 173 Duhem-Quine thesis, 23 Durand, D., 43–45, 50, 70, 71 Dynamic asset allocation, 182 Economics financial, 5, 29, 70–74, 249, 250 ketchup, mathematicization of, 7–10, 45 normative, positive, Efficient-market hypothesis, 8, 28, 29, 57, 65–67, 75–77, 80, 85–88, 94–98, 137, 247, 248, 251, 255, 256, 298 Eisen, I., 150–155 Electronic Data Systems, 83 Embedding, 216, 265 Employee Retirement Income Security Act of 1974, 86, 87 Index Enron, 262 Equilibrium, 7, 42, 53–56 European options, 159 Falker, E., 144 Fama, E., 29, 30, 65–70, 89–95, 98, 106, 112–116, 256 Federal Reserve, 1–4, 167, 236 Finance behavioral, 35, 97, 246, 266–268 mathematicization of, 7, 8, 37, 38 social studies of, 25, 267, 268, 273, 274 Finance theory, 9, 29, 250, 251 Financial Analysts Journal, 81, 82 First Options, 206 Flight to quality, 225, 230, 236–239, 273 Fouse, W., 85, 91 Fractal geometry, 112, 117 French, K., 91–94 Friedman, M., 8–12, 40, 42, 50, 146–148, 171, 252 Fundamental analysis, 76–78 Funds hedge, 231, 232 index, 29, 30, 84–88, 104 mutual, 78, 79 pension, 83, 86 Futures, 13, 299 agricultural, 13–15, 143 currency, 145–148 financial, 144 and gambling, 144, 145 index, 4, 144, 172–175, 181 Galai, D., 159 Galbraith, J., 193 Gambling, 15, 58, 124, 144, 145, 158, 171, 176, 247, 262 Game theory, 18 Gastineau, G., 162–164 Gastineau-Madansky model, 163 Gennotte, G., 195, 198, 223 Gladstein, M., 158, 257 Glass-Steagall Banking Act, 91 Globalization, 242 Go-go, 148, 149 Goldberg, D., 150, 151 373 Goldman Sachs, 175, 227, 244, 250 Goodstein, D., 79, 80 Graham, B., 76–79 Granger, C., 115, 116 Granovetter, M., 216, 264, 265 Greenbaum, M., 167, 168 Greenspan, A., 1, 2, 236 Gross national product, 149 Haircuts, 217, 289, 299 Harries, B., 173 Harris, E., 147, 148 Harrison, J., 140, 141 Harrison, P., 268 Harvard Business School, 261 Hayek, F von, 10 Hedging, 13, 126, 130, 132, 136, 176, 299 Hiatt, J., 206 Hickman, W., 254 High-Risk Opportunities, 230 Hinkes, T., 208–210 Houthakker, H., 62, 110, 111 Hull, B., 162 IBM Research Center, 107 Icahn, C., 254 Imitation, 34, 225–228, 272, 273 Index futures, 4, 144, 172–175, 181 Institute of Chartered Financial Analysts, 79 International Monetary Market, 148, 152, 155, 265 Irrelevance propositions See ModiglianiMiller propositions Italy, 220 Itô, K., 135 Jackwerth, J., 205 Jacobs, B., 183 Jaguar Fund, 272 James A Oliphant & Co., 83 Japan, 215, 217, 220, 237, 239 Jensen, M., 73, 78, 79, 84, 85, 90, 95–97, 130 Jewish Labor Committee, 145 Johnson, P., 171, 172 374 Index Journal of Finance, 38 Journal of Financial Economics, 70, 96 Jump protection, 182, 207 JWM Partners, 239, 273 Kahneman, D., 246, 266 Kansas City Board of Trade, 99, 173 Kaplan, G., 80 Kaplanis, C., 220, 228, 229, 231 Kassouf, S., 123–126, 163, 246, 282 Kendall, M., 61–63, 71, 72, 113, 244 Ketchum, M., 46 Keynes, J., Knorr Cetina, K., 242 Koopmans, T., 46–48 Kreps, D., 140, 141 Kruizenga, R., 63 Kuhn, T., 96, 97 Kuznets, S., 149 Lakatos, I., 107 Latour, B., 22, 26, 33 LeBaron, D., 85 Lehman Brothers, 230 Leland, H., 72, 73, 179, 187, 188, 194–199 Leland O’Brien Rubinstein Associates, Inc (LOR), 180–184, 187–190, 197, 198 Leverage, 90, 91, 122, 217, 219, 226, 299 Lévy distributions, 108–117, 209, 210, 246, 260, 279 Lévy, P., 60, 106, 108 Lind, B., Lintner, J., 57, 245 Long-Term Capital Management, 27, 28, 34, 35, 211, 218–242, 248, 249, 264, 269, 270, 291, 292 Lorie, J., 69, 79, 104, 149 MacBeth, J., 89, 90 Madansky, A., 163 Major Market Index, 173, 189 Malaysia, 265 Malkiel, B., 80, 146–149, 252 Mandelbrot, B., 30, 105–118, 195 Market design, 274 Markets, infrastructures of, 12–15 Markowitz, H., 5, 7, 28, 45–53, 71, 253 Mark to market, 234, 235 Martingales, 65, 140, 141, 300 Massachusetts Institute of Technology, 71, 243 McCloskey, D., 25 McDonough, W., 236 McKean, H., Jr., 122, 138 McKerr, J., 154 McQuown, J., 84, 85, 90 Melamed, L., 1, 143–148, 151, 152, 155, 171–174 Merc See Chicago Mercantile Exchange Meriwether, J., 34, 211, 214–217, 223, 227, 233, 234, 242, 267 Merrill Lynch, 2, 69, 83 Merton, R C., 5, 12, 31, 34, 71, 134–138, 211 Merton, R K., 2, 19, 20, 35 Metallgesellschaft AG, 262 Milken, M., 254 Miller, D., 24, 25, 263 Miller, M., 5, 12, 28, 38–45, 70, 71, 112, 149 Mirowski, P., 7, Miyojin, S., 217 Modigliani, F., 8, 28, 38–45, 71 Modigliani-Miller propositions, 28, 40–45, 66, 67, 89, 128, 245, 253, 254, 260, 261, 277, 278 Molodovsky, N., 81 Momentum effect, 103 Monetarism, 8, Mont Pèlerin Society, 10, 40, 55 Moore, A., 69, 113 Morgan, J., 105 Morgan, M., Morgan Stanley, 250 Mortgage-backed securities, 213, 214, 227 Mossin, J., 57, 245 Mullins, D., Jr., 223 Muth, J., 39 Myers, S., 255 Index Nathan Associates, 149, 150 Nathan, R., 149 National accounts, 149 National Association of Securities Dealers Automated Quotation System (NASDAQ), 100, 169 National General warrants, 247–249 New York Stock Exchange, 2, 3, 166, 188, 189, 199 Norris, F., 15 O’Brien, J., 82, 83, 180, 197, 199 O’Connor and Associates, 168, 175, 209 O’Connor, E., 147, 150–155 Officer, R., 115, 116 Open-outcry trading, 15, 153, 264, 300 Operations research, 7, 45, 47, 48, 128 Options, 5, 6, 30–33, 119–142, 149, 150, 167, 168, 202, 256–259, 285–288, 300 Options Clearing Corporation, 206, 209, 260 Orr, D., 115, 116 Osborne, M., 64, 65, 113 Painter, G., 171 Parkinson, M., 160–162 Pearson, K., 60 Perelman, R., 254 Performativity, 16, 35, 263, 265, 275 Barnesian, 19, 33, 164–166, 252–259, 265 effective, 17, 18, 252, 253 generic, 16–18 Phelan, J., 188, 189 Pits, 15, 32, 153, 156, 157, 198, 264, 300 Popper, K., 10 Portfolio insurance, 179–184, 196–200 Portfolios hedged See Hedging market, 92–94 replicating, 20–23, 136, 137, 179, 183, 224, 250 super-, 34, 35, 225, 236, 237, 239, 273 Portfolio selection, 45–51, 56, 114, 253 Power, W., 153, 154 375 Prais, S., 62, 63, 71, 72 Presidential Task Force on Market Mechanisms See Brady Commission President’s Working Group on Financial Markets, 225 Princeton Newport Partners, 175, 176, 187 Professionalization, 79 Prospect theory, 266, 267 Put-call parity, 169, 170, 202 Puts, 6, 119, 159, 200, 207, 300 Quandt, R., 146–149, 252 Quants, 31, 93 Randomness, 30, 105, 106, 209, 210 Random-walk models, 28–31, 57–67, 75, 76, 80, 106, 111, 120, 121, 141, 142, 180, 204, 301 Rational expectations, 8, 39, 117, 195, 196 Reaganomics, 184, 185, 261 Regnault, J., 58, 59 Regulation T, 44, 142, 158, 176 Repo, 217, 289, 290, 301 Rinfret, P., 80 Risk premium, 129 Rissman, B., 158, 166 Roberts, H., 64, 65, 76, 77 Robertson, J., 272 Roll and Ross Asset Management, 102, 103 Roll, R., 30, 92, 93, 94, 102, 114, 116, 227, 254 Rosenberg, B., 83, 84 Rosenfeld, E., 205, 215–217, 222, 228, 229 Ross, S., 72, 139–141, 258, 259, 269 Roy, A., 244 Royal Dutch/Shell, 220–228, 233 Rubinstein, M., 22, 32, 165, 176, 179, 184, 206, 271 Runs, on banks, Salomon Brothers, 34, 211–218, 227, 229, 231, 244 Samsonite, 85, 86, 91 376 Index Samuelson, P., 8–12, 31, 62–64, 70, 71, 78, 99, 114, 121–123, 133–135, 138, 139, 271 Sandor, R., 170 Sargent, T., 114 Savage, L., 63 Scholes, M., 5, 34, 66, 71, 90, 104, 105, 130, 131, 183, 211, 224, 242–247 Schwartz, E., 179 Schwartz, M., 205, 206 Schwayder, K., 85 Securities and Exchange Commission, 144, 149, 172 Separation theorem, 51, 56 Shad, J., 172 Shad-Johnson Accord, 172, 176 Shannon, C., 124 Sharpe, W., 5, 28, 51–57, 73, 81, 87, 90, 93, 94, 137, 138, 245 Shiller, R., 137, 193, 196, 197 Shit selling, 208, 264 Shleifer, A., 104, 270 Short selling, 9, 142, 176, 270, 271, 301 Short squeeze, 216, 270 Shultz, G., 148 Simon, H., 39, 40, 72, 123, 138 Simon, W., 171 Sinquefield, R., 85, 86, 99, 100 Skew See Volatility skew Sloan, A., Jr., 260 Small-firm effect, 96, 99, 100 Smelcer, W., Smile See Volatility skew Sociology economic, 12, 13, 25, 26, 101, 216, 217, 263–267 of scientific knowledge, 21 Sornette, D., 195 Soros, G., 198 Specialists, 2, 66, 170, 199, 301 Speculators, 13 Spreading, 32, 164–166, 256, 268, 301 Sprenkle, C., 121, 122, 126, 132, 281, 282 Stambaugh, R., 93 Standard and Poor’s 500 index, 2, 104, 155, 172–174 Stark, D., 224, 271 Status groups, 153 Stigler, G., 40–43 Stigum, M., 290 Stochastic calculus, 122, 135 Stock auctions, 198, 199 Stock prices, 65, 72, 73, 120, 121 Stratonovich, R., 135 Strike price, 120, 125, 126, 167, 300 Sufficient similarity, 271 Sullivan, J., 143–145 Sunshine trading, 197–199 Swaps, 214, 218, 302 Swap spreads, 218–220, 226, 231, 232, 233, 237–239, 291, 292, 302 Tails, fat, 30, 109–116, 258 Taleb, N., 185, 186 Theobald, T., Thorp, E., 31, 124–127, 132, 133, 176, 187, 194, 197, 246, 247 Ticker, 75 Tobin, J., 8, 50, 51 Travelers Corporation, 229 Treynor, J., 7, 57, 67, 81, 82, 127–129, 245, 250, 261, 283 Turn-of-the-year effect, 96–99, 248 Tversky, A., 246, 266 Underlying factor model, 51–54 University of Chicago, 69, 71, 243, 255, 256 Uptick rule, 138, 270, 274 Value at risk, 222, 232, 260, 302 Value Line index, 99, 173, 175 Vasicek, O., 84, 85, 117 Vertin, J., 80, 82 Volatility, 21, 158, 159, 165, 168, 235–238, 251, 299, 302 Volatility skew, 25, 33, 202–207, 248, 258, 264, 301 Walden, W., 124 Warrants, 31, 121–127, 130, 135, 281, 282, 302 Weill, S., 229 Index Weinberger, D., 95, 175, 186 Wells Fargo Bank, 84, 85, 90, 91, 255 Wells Fargo Investment Advisers, 188 Wenman, D., 264 Weston, J., 38, 52 Whitley, R., 28, 244 Wiener, N., 63, 64 Williams, J., 46, 47 Wilshire Associates, 83 Wilson, H., 143 Working, H., 60, 61, 95 Wunsch, S., 197, 199 Zipf ’s law, 107 377 ... camera : how financial models shape markets / Donald MacKenzie p cm — (Inside technology) Includes bibliographical references and index ISBN 0-262-13460-8 Capital market Mathematical models Derivative... pace in the 1960s and the 1970s At its core were elegant mathematical models of markets To traditional finance scholars, the new finance theory could seem far too abstract Nor was it universally... changing financial markets and that of the emergence of modern finance theory The markets provided financial economists with their subject matter, with data against which to test their models, and with