Arbitrage Transactions Research Articles

Passenger car market and regional price discriminations for new cars: Case study and empirical analysis for Poland 2004–2021

Abstract Poland disposes on a large stock of mostly aged private passenger cars. In contrast younger cars still play minor role in individual mobility. The contribution analyzes reasons of lagging modernization by focusing on new cars prices with respect to regional price discrimination. It finds in 2004-2021 substantially increasing new cars prices and regional price discrimination between Poland and Germany. Price differentials were positive, with lower prices in Poland, and increased during time. Producers discriminated by prices increasingly but also limited arbitrage transactions by controlling excess differentials. Optimal regional price discrimination could support car markets developments in Poland by stock age compositions shifts towards younger cars. However, applied discrimination proves in observed market environments not sufficient to achieve a great car market transition in near future.

An innovative high-frequency statistical arbitrage in Chinese futures market

The primary use of futures is hedging risk. Traders in the spot market can hedge certain risks through the futures market. With the development of the futures market, the arbitrage transactions around futures have attracted increasingly attention. The aim of this paper is to establish an innovative and unique pairs trading framework, and use it to test the effectiveness of China's futures market. The framework for pairs trading is based on cointegration test, Kalman filter and Hurst index filtering. We use the data of 47 commodities with relatively good liquidity in the Chinese commodity futures market. We apply the representative index of China's commodity futures market, "Wenhua Commodity Index" as the benchmark, to evaluate the performance of the strategy and compare it with the benchmark model. This study found that, according to the pairs trading framework, after considering transaction costs, the cumulative return in the sample reached 81%, the cumulative return out of the sample was 21%. It is worth noting that the out-of-sample maximum drawdown achieved excellent results of no more than 1%. In the same period, trading the Wenhua Commodity Index with a "buy and hold" strategy achieved a gain of 31%, but with maximum drawdown reached 15%. The values of our paper are, first it proves that Chinese commodity futures market is not a weak-form efficient market, because technical analysis based on machine learning could obtain excess returns. Second, this research combines the theory and practice of statistical arbitrage, which also provides guiding significance for investment practice.

Do biofuel production and financial speculation in agricultural commodities influence African food prices? New evidence from a TVP-VAR extended joint connectedness approach

Many African countries experienced social disorder and subsequent political instability as a result of global commodity price inflation in 2007–2008, which reaffirmed the importance of overseas factors such as biofuel production, international food and energy prices, and financial speculation. Biofuel, in particular, is often placed at the center of the debate around identifying potential determinants of food price hikes. We apply a time-varying parameter vector autoregressive (TVP-VAR) extended joint connectedness approach to uncover the dynamic connectivity of African food prices, US biofuel production, global energy and food prices, and financial speculation. The key findings are; 1) the results of averaged connectedness suggest that US biofuel production and financial speculation in agricultural commodities significantly influence African food prices; 2) the hefty surges in the dynamic connectedness between African food prices and four cross-border factors are triggered by global events like the 2000 dot-com bubble, the 2008 global commodity boom, and the 2020 COVID-19 pandemic; 3) arbitrage transactions transmitted intense shocks to African food prices between 2001 and 2012, while biofuel production constantly affected African food prices between 2001 and 2021. We draw pragmatic policy implications to prevent or mitigate market shock transmissions to African food markets.

Economic Significance of Arbitrage Transactions in the Tesla Industry

Arbitrage transactions have played a significant role in allowing Tesla to exploit the minor differences in price between its similar and identical assets in two or more markets. In this case, as an arbitrage trader, Tesla undertakes the responsibility of purchasing assets in one market and selling them out at the same period to pocket any differences between the two prices. In this paper, there are two main parts of arbitrage transactions. The first part is three methods that can be utilized to analyze the options prices. These methods are linear regression and random Walk Theory, and Black Scholes. Their functionalities, influences, and theory are demonstrated in this paper. When using Black Scholes to calculate desired options prices and figure it in linear regression, assuming time to the expiration date, volatility, and risk-free rate are the same. The estimated trend and outcome are stated and described in this paper. The second part is about arbitrage transactions based on option prices. The circumstances of arbitrage transactions used by Tesla are analyzed and the utilized method called fundraising is demonstrated, and its functionality is analyzed with data and facts to prove the significance of arbitrage transactions. The paper also points out it is possible to use black scholes to estimate option prices in linear regression graphs and random walk theory. Call and put options prices are related to stock prices. They all shared a similar trend when time flows. The true value of this research is that people do not need to simply use a single method to estimate values, but to combine them, use them together to better understand the estimation of prices.

Certain Issues of Concluding an Arbitration Agreement on Disputes with a Foreign Element

The article examines the current state of legislative regulation of the issues of concluding an arbitration agreement. Scientific approaches to the concept of an arbitration agreement are analyzed, a comparative analysis of the definition of this concept in international documents, in particular, the UNCITRAL Model Law on International Commercial Arbitration and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, as well as the consolidation of the corresponding concept in the norms of domestic legislation On this basis, the author's definition of the concept of an arbitration agreement is proposed.
 The authors analyze approaches to the classification of arbitrage transactions. It is noted that the classification fixed by the legislation into two types - an arbitration agreement and an arbitration clause - has received the greatest application in the practical plane. It is indicated that from a practical point of view, the arbitration agreement is more adapted to a specific dispute, since the procedural aspects in it are more defined. However, an arbitration clause is a more common type of transaction because it is included in the contract before the dispute arises between the parties. In this regard, it is easier for the parties to reach a compromise on arbitration issues. Doctrinal approaches to the classification of arbitration agreements are also explored.
 Regarding the content of the agreement, the authors point out that despite the position set out in the legislation on maximum assistance to the parties in exercising their right to submit a dispute to arbitration, an exact indication of the name of the arbitration institution to which the dispute is submitted is necessary. This is one of the important conditions for recognizing the arbitration agreement as feasible, creating conditions for further legitimate arbitration consideration of the dispute and the proper execution of the arbitral award.
 Concerning the issue of arbitrability of disputes, the authors indicate that today this concept has not found normative consolidation. It is positive that the list of disputes that cannot be referred to arbitration by the norms of the Economic Procedural Code of Ukraine is fixed. At the same time, the inexhaustibility of this list creates conditions for a certain legal uncertainty. The authors express an opinion on the need for further improvement of the legislation in terms of determining the range of non-arbitrable disputes.

부동산 소득과 부동산 자산 간 선순환 구조에 관한 연구

Although real estate accounts for the most household assets in Korea, only a few studies have been performed to identify the determinants of real estate assets, and in particular, few studies on income from real estate. Utilizing the SUR two-way fixed effect model, this study analyzed the relationship between assets and income from real estate. The empirical results present that the household head creates an income stream through real estate assets, and the income stream is invested in a virtuous cycle to accumulate real estate assets. However, the reciprocal relationship between real estate assets and income for the long-term virtuous cycle was about 0.2, which is not strong. This result may imply that the main purpose of Koreans buying real estate assets is for arbitrage transactions rather than cash flow. As this study is the first attempt to demonstrate the long-term correlation between real estate assets and income, further research needs to provide more in-depth discussion and policy implications.

Analyzing the efficiency of portfolio strategies based on the dividend yield concept: Evidence from the Russian stock market

Subject. The article focuses on the formation and management of the securities portfolio. In developed economies, various strategies are used to manage portfolios. The tendencies permeate the practice of portfolio managers and in the domestic market. Objectives. We analyze the efficiency of portfolio management strategies based on the dividend yield concept in order to find the most appropriate one for the Russian market for mid-term investment. Methods. The study is based on general methods of logic, comparative and statistical analysis, graphical and indicative comparative analysis. Results. Having tested strategies based on the dividend yield concept, we suggested using an improved mid-term strategy, which may suit many investors, including institutional ones. The article presents our suggestions on the improvement of a strategy for creating and managing a securities portfolio in the Russian stock market, which is based on the Dogs-of-the-Do principle. Conclusions and Relevance. Drawing upon the dividend yield concept, the proposed strategy ensures the average yield exceeding those of DOW 5 and DOW 10 strategies, bank deposit and investment in federal loan bonds. However, it is inferior to IMOEX and MOEXBS due to the lose of the portfolio balance once a year. Securities within the strategy make up ETF to lure more investors. The inclusion of FXUS increased the average annual yield by 2.45 percent. The addition of FXMM significantly reduces foreign currency risks. To optimize the strategy, there should be REPO with the central counterpart and CCP-cleared REPO, which raises its yield through arbitrage transactions.

The Premium of Economic Policy Uncertainty Beta: An Explanation Based on the Certainty Effect

In order to deal with complex international situations and arduous domestic reform and development tasks, especially the serious impact of the COVID-19 epidemic, the Chinese government actively plays the macroeconomic regulation and control role of economic policies, and makes economic policy uncertainty constantly increasing. According to the classical asset pricing theory, assets with high risk exposure will demand high expected return, thus there should be a positive risk premium for economic policy uncertainty exposure. In this paper, we take A-share in the Chinese stock market as the research sample, and use the Beta coefficient of the regression of stock returns to economic policy uncertainty as the risk exposure of economic policy uncertainty. We find that economic policy uncertainty Beta can produce significant negative premium, and cannot be explained by other stock characteristics, industries and equity natures, which obviously goes against the asset pricing theory.By analyzing the mechanism, it is found that when economic policy uncertainty is increasing, the stock price with higher economic policy uncertainty Beta is also increasing. For the sake of uncertainty aversion, investors will reduce their holdings of these stocks in the future, so as to produce lower expected returns. However, there is no significant relationship between economic policy uncertainty Beta and expected returns for stocks with lower economic policy uncertainty Beta and when economic policy uncertainty is weakening. Therefore, the negative premium of economic policy uncertainty Beta is caused by the certainty effect of investors. Although investors always use the economic policy to carry out arbitrage transactions, which may produce arbitrage risks, the negative premium of economic policy uncertainty Beta is not caused by arbitrage risks.Furthermore, we construct the economic policy uncertainty factor, and find that the five-factor model including FF3 factor, profitability factor and economic policy uncertainty factor has better pricing efficiency on cross-sectional stock returns in the Chinese stock market. We suggest that the economic policy has a “double-edged sword” effect, and high economic policy uncertainty will produce negative economic consequences. Facing the great challenge of profound changes in the global economic environment in the post epidemic era, strengthening the continuity, stability and sustainability of economic policies under the macro-prudential framework is conducive to maintaining the confidence of investors and the stability of the financial market.

Trading in the housing market: A model with transaction costs

High predictability of returns on housing suggests pervasive irrationality on the part of market participants. In this paper, we show that with small transactions costs, returns may remain highly predictable even if the market contains substantial numbers of risk neutral, rational speculators. The reason is that option values associated with the transactions costs substantially delay arbitrage transactions. Our model can generate positive short-run and negative long-run autocorrelation in returns on housing similar to those identified by past empirical studies.

Does Index Arbitrage Distort the Market Reaction to Shocks?

We show that ETF arbitrage distorts the market reaction to fundamental shocks. We confirm this hypothesis by creating a new measure of the intensity of arbitrage transactions at the individual stock level and using an event study analysis to estimate the market reaction to economic shocks. Our measure of the intensity of arbitrage is the probability of simultaneous trading of ETF shares with shares of underlying stocks estimated using high frequency data. Our approach is direct, and it accounts for statistical arbitrage, passive investment strategies, and netting of arbitrage positions over the day, which the existing measures cannot do. We conduct several empirical tests, including the use of a quasi-natural experiment, to confirm that our measure captures uctuations in the intensity of arbitrage transactions. We focus on oil shocks because they contain a large idiosyncratic component which facilitates identication of our mechanism and interpretation of the results. Oil shocks are identified using weekly oil inventory announcements.

A Study on the Nonlinearity in the Arbitrage Transactions of Cryptocurrency: Using the Bitcoin Prices in Several Countries

A Study on the Nonlinearity in the Arbitrage Transactions of Cryptocurrency: Using the Bitcoin Prices in Several Countries

Time, Arbitrage, and the Law of One Price: The Case for a Paradigm Shift

:Consider a Competitive, Efficient, and Frictionless Economy (CEFE) where resources are scarce at any date, and hence money as a valid claim against scarce resources is also scarce. In this economy, there is always price competition, which can at any date generate an unlimited number of arbitrage opportunities. For example, at any date, opportunities can exist to buy and sell each one of the contracts for delivery of the same good or asset at multiple prices currently as well as on an infinite number of future dates. I prove all arbitrage transactions, including “spot” transactions, tie up arbitrageurs’ capital representing money, good or asset such that this capital cannot be used for any other purpose for a non-zero quantity of time. This makes it impossible to exploit all arbitrage opportunities with the scarce capital available at any date and leads to an infinite number of unexploited opportunities and a non-negligible opportunity cost of the capital tied-up in arbitrage transactions, represented by each arbitrageur’s best missed arbitrage opportunity, if no better opportunity exits, hence the breakdown of the law of one price in its standard sense. This helps construct a new paradigm of CEFE which resolves long-standing theoretical, empirical, and experimental puzzles.

Anomalous Deal Return Capture: A Cross-Sectional Study of Three Hypothetical Global Merger Risk Arbitrage Portfolios 2000-2016

This paper examines the annual risks and returns of three disparate, hypothetical merger arbitrage portfolio strategies as an attempt to capture alpha from an in-sample study of 793 global M&A transactions covering the January 2000 thru December 2016 time period. Previously written and undoubtedly the most prominent literature into M&A and merger arbitrage [Schleifer & Vishny ‘97], [Mitchell & Pulvino ‘01] and [Baker & Savasoglu ‘02] focus on the limits of pure arbitrage the creation of such from noise/shock trading and the risk & return characteristics of a merger arbitrage trading strategy respectively. This paper by no means covers the universe of the arbitrage literature and touches only a fraction of arbitrage research – yet, this is the only paper I know of examining global merger arbitrage transactions and the construct of a long-only merger arbitrage strategy encompassing both US as well as non-US merger arbitrage deals and bench-marking the portfolios' risk and returns series against a non-U.S. benchmark. This study demonstrates that alpha can be added by purchasing target companies as part of a long-only global merger arbitrage strategy. Furthermore, above benchmark returns can be earned by also buying the targets of terminated deals. This study is less conclusive on the incremental value of purchasing the acquiring company's shares following a successful or terminated deal where stock is part of the deal consideration.

Investigating the use of the method of "nearest neighbors" to predict the behavior of stock prices in the implementation of arbitrage

In this paper, it was considered one of the types of trading in the stock market - Implementation of arbitrage. The aim of the study was to examine the possibility of using the method of "nearest neighbors" with heuristic rules to predict short-term stock price behavior during arbitrage transactions. In a paper tests the hypothesis that the two parameters - TotalRise (percentage price change over the entire period of growth) and LastChange (percentage change in price over the last day) - are crucial for predicting the behavior of stocks after a sharp rise on positive news. Consequently, an investor might assume, how to behave in the price of the shares, if the result will analyze arbitrage other stocks have close to the value of the shares and TotalRise LastChange. For this action, the risk of loss was defined as the ratio of the neighbors with a loss to all of its neighbors (if 20 neighbors of the action 5 neighbors were unprofitable (i.e. the respective shares rose in price), the riskiness of the operation can be set equal to 25%). Win value was defined as the average of the gains (and losses) of all the neighbors. As a result, developed a model is plausible determines the behavior of the shares.

Asymmetric dynamics in correlations of treasury and swap markets: Evidence from the US market

Using the asymmetric dynamic conditional correlation (A-DCC) model developed by Cappiello et al. (2006), this paper empirically analyzes the conditional correlation between treasury and swap markets from February 9, 2006 to May 31, 2011, and makes two key contributions. First, the dynamics of the conditional correlation of only the 2-year maturity differs from those of other maturities. These patterns might be explained by the fact that a 2-year maturity is easily affected by market forecasts of monetary policy changes by the Federal Reserve Board. Second, the financial crisis dummies (ξ1) are all negative in particular with significance at the 5% level for 7 year, 10 year, and 30 year maturities. This result indicates that arbitrage transactions between treasuries and swaps have not taken place on a sufficient scale during the financial crisis period. As Ito (2010) points out, market participants have been uncertain about the direction of the monetary policies of these financial institutions.

Theory and Evidence of Arbitrage Trading of Equity Futures

The equity futures market was opened in May 6th, 2008 for the first time in Korea but nonetheless it has rarely been researched since. In this paper, we examine whether the market, combined with the stock market, its underlying market, has been offering any arbitrage opportunities to market participants for the period of May 6th, 2008 to March 11, 2010, focusing on the two futures contracts of Samsung Electronics and Hyundai Motors, the two most actively traded ones. Our findings are as follows. First, there have been arbitrage opportunities for the two futures in either direction. Second, the average time period for an arbitrage opportunity was two seconds so arbitrage transactions were feasible indeed. Third, nevertheless, some arbitrage transactions ended up with a loss because the estimated spot price at maturity to carry out an arbitrage trading turned out to be significantly different from the realized one. The discrepancy in these two prices causes a seemingly very safe arbitrage trading a risky one. This risky feature of an arbitrage trading has never been addressed in depth in a paper or a book before, and is a major contribution of this paper.

Capital Constraints, Counterparty Risk, and Deviations from Covered Interest Rate Parity

We provide robust evidence of deviations from the Covered Interest Parity (CIP) relation since the onset of the crisis in August 2007. The CIP deviations exist with respect to different dollar interest rates and exchange rate pairs of the dollar vis-a-vis other currencies. The results show that our proxies for margin conditions and cost of capital are significant determinants of the basis. Following the bankruptcy of Lehman Brothers, uncertainty about counterparty risk became a significant determinant of CIP deviations. The supply of dollars by the Federal Reserve to foreign central banks via reciprocal currency arrangements (swap lines) reduced CIP deviations. In particular, the announcement on October 13 2008 that the swap lines would become unlimited reduced CIP deviations substantially. These results indicate a breakdown of arbitrage transactions in the international capital markets during the crisis partly due to lack of funding and partly due to heightened counterparty credit risk. Central bank interventions helped to reduce the funding liquidity risk of global institutions.

The limits to stock index arbitrage: Examining S&P 500 futures and SPDRS

AbstractThis study examines factors affecting stock index spot versus futures pricing and arbitrage opportunities by using the S&P 500 cash index and the S&P 500 Standard and Poor's Depository Receipt (SPDR) Exchange‐Traded Fund (ETF) as “underlying cash assets.” Potential limits to arbitrage when using the cash index are the staleness of the underlying cash index, trading costs, liquidity (volume) issues of the underlying assets, the existence of sufficient time to execute profitable arbitrage transactions, short sale restrictions, and the extent to which volatility affects mispricing. Alternatively, using the SPDR ETF as the underlying asset mitigates staleness and trading cost problems as well as the effects of volatility associated with the staleness of the cash index. Minute‐by‐minute prices are compared over different volatility levels to determine how these factors affect the limits of S&P 500 futures arbitrage. Employing the SPDR as the cash asset examines whether a liquid tradable single asset with low trading costs can be used for pricing and arbitrage purposes. The analysis examines how long mispricing lasts, the impact of volatility on mispricing, and whether sufficient volume exists to implement arbitrage. The minute‐by‐minute liquidity of the futures market is examined using a new transaction volume futures database. The results show that mispricings exist regardless of the choice of the underlying cash asset, with more negative mispricings for the SPDR relative to the S&P 500 cash index. Furthermore, mispricings are more frequent in high‐ and mid‐volatility months than in low‐volatility months and are associated with higher volume during high‐volatility months. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1182–1205, 2008

Impact of the introduction of derivatives on underlying volatility: evidence from India

This article investigates the changes in volatility in the Indian stock market after the introduction of derivatives. There is strong evidence of a reduction in the volatility of the underlying shares after the introduction of derivatives. This is largely attributable to a reduced persistence in the previous day's volatility. However, the interday unconditional volatility of the equity index increases. This contradiction is explained by an increased correlation between the prices of its constituent shares caused by arbitrage transactions in the cash market. This study reconciles the apparent contradictions in the results of earlier studies, some of which report an increase, as against many others which report a decrease, in the volatility on introduction of index futures.

An Information Approach to International Currencies

This paper addresses currency competition from an information perspective. Transactions in traditional models do not convey information, so transaction costs - the driver of competition outcomes - are driven by market size. In our model, transactions do convey information (consistent with recent empirical findings). Several important departures arise. First, adding the information dimension resolves the traditional indeterminacy of currency trade patterns (by mitigating the concentrating force of market-size economies). Second, whether transactions are executed directly or through a vehicle actually affects prices (because these trading methods do not in general reveal the same information). Third, our model provides a new rationale for why some currency pairs never trade directly (information is not sufficiently symmetric to support trading). Fourth, our model formalizes the arbitrage process and shows that arbitrage transaction quantities and price levels are jointly determined. Empirically, the paper provides a first integrated analysis of transactions in a triangle of markets: Yen/$, $/Euro, and Yen/Euro. Data for the full triangle permits comparison of direct, indirect and arbitrage transactions, for each pair. The information model makes the important prediction that transactions should affect prices across markets (e.g., flow in the Yen/$ market should convey information relevant to $/Euro and Yen/Euro prices), which is borne out.