Dynamics of Arbitrage

Journal of Financial and Quantitative Analysis, Forthcoming

62 Pages Posted: 11 Feb 2021

See all articles by Louis H. Ederington

Louis H. Ederington

University of Oklahoma - Division of Finance

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Kateryna V. Holland

University of Missouri - Trulaske College of Business

Thomas K Lee

Energy Information Administration - US DOE

Scott C. Linn

University of Oklahoma - Michael F. Price College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 14, 2020

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 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

Ederington, Louis H. and Fernando, Chitru S. and Holland, Kateryna V. and Lee, Thomas K. and Linn, Scott C., Dynamics of Arbitrage (May 14, 2020). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3743828

Louis H. Ederington

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States
405-325-5591 (Phone)
405-325-7688 (Fax)

Chitru S. Fernando (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Kateryna V. Holland

University of Missouri - Trulaske College of Business ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States

Thomas K. Lee

Energy Information Administration - US DOE ( email )

1000 Independence Avenue, SW
Washington, DC 20585
United States

Scott C. Linn

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States
405-325-3444 (Phone)
405-325-1957 (Fax)

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