Journal of Financial and Quantitative Analysis Vol. 56 No. 4 2021

Dynamics of Arbitrage

Louis H. Ederington¹; Chitru S. Fernando¹; Kateryna V. Holland^2,3; Thomas K. Lee⁴; Scott C. Linn¹

¹ University of Oklahoma · ² Missouri College · ³ University of Missouri · ⁴ U.S. Energy Information Administration

Abstract

We study the dynamics of cash-and-carry arbitrage using the U.S. crude oil market. Sizable arbitrage-related inventory movements occur at the New York Mercantile Exchange (NYMEX) futures contract delivery point but not at other storage locations, where instead, operational factors explain most inventory changes. We add to the theory-of-storage literature by introducing two new features. First, due to arbitrageurs contracting ahead, inventories respond to not only contemporaneous but also lagged futures spreads. Second, storage-capacity limits can impede cash-and-carry arbitrage, leading to the persistence of unexploited arbitrage opportunities. Our findings suggest that arbitrage-induced inventory movements are, on average, price stabilizing.

DOI

10.1017/s0022109020000204

Volume

56

Issue

4

Pages

1350-1380

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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