Dynamics of Arbitrage
Journal of Financial and Quantitative Analysis, Forthcoming
62 Pages Posted: 11 Feb 2021
Date Written: May 14, 2020
We study the dynamics of cash-and-carry arbitrage using the U.S. crude oil market. Sizable arbitrage-related inventory movements occur at the 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.
Keywords: theory of storage, commodity markets, cash-and-carry arbitrage, financialization, spot oil markets, oil futures markets, oil storage
JEL Classification: G13, G18, Q41
Suggested Citation: Suggested Citation