Arbitrage Research Articles

Changes in Fuel Prices and the Use of Public Transport: Insights from the European Union following the Invasion of Ukraine

Rising fuel prices are known to affect public transport (PT) demand. However, the impact of the oil market inflation and subsequent energy crisis following the 2022 Russian invasion of Ukraine on mobility behaviour in Europe has received little attention. This study examines shifts in fuel prices and PT mobility across 25 Europe-an Union countries between February and May 2022. Weekly variations in PT mobility were correlated with diesel and gasoline prices, and a multiple linear regression was conducted to assess the influence of contextual factors in explaining variations in PT usage. The results indicate a significant increase in PT mobility across all countries after February 2022, which was positively associated with rising fuel prices. Approximately 84% of the variance in mobility was explained, with more pronounced increases observed in countries characterised by lower telecommuting prevalence, higher housing costs relative to household income, greater price differentials between gasoline and diesel, lower adoption of alternative fuels, and higher motorisation rates. These findings suggest that the surge in fuel prices, driven by the 2022 energy crisis, may have stimulated an increase in transit ridership.

Liquidity Preference, Interest Rate Spread, and the Transformation of the US Financial System

This article examines empirical patterns of interest rate spreads between yields on long-term corporate bonds and the Federal Funds Rate (FFR) in the United States over the period from 1960 through 2023. Since the early 1980s, discernible patterns of interest spreads have emerged, revealing marked deviations in corporate bond yields from the FFR. We focus on financial market forces particularly arising from financial intermediaries in analyzing these patterns. To this end, the article develops a theoretical framework based on the concept of liquidity preference in Keynes’s 1937 papers and the works of Hyman Minsky and Victoria Chick. We also conduct cointegration analyses for corporate bond yields, the FFR, and financial intermediaries’ leverage ratios. Overall, our empirical results indicate that the relationship between the FFR and corporate bond yields—particularly with respect to their long-run relationship and interest rate markups—has markedly changed since the 1980s and is significantly affected by financial intermediaries’ asset/capital leverage ratios. As a policy implication, regulatory reforms aimed at enhancing the Federal Reserve Bank’s capacity to steer long-term rates and contain intermediaries’ balance sheet leverage, particularly those centered on risky asset trading to increase gains from price differentials, are required JEL Classification: B26, E11, E43, E52

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.

Designing Efficient Pair-Trading Strategies for the Technology Stock Market

Pairs trading is a quantitative trading approach that exploits instances of financial markets exhibiting disequilibrium. Through the identification of a pair of stocks with a his-torical pattern of correlated movement, and under the assumption that their price differentials will return to a central tendency, an investor can seek to gain from this mean-reversion by establishing a long position in the designated pair. Throughout the years, numerous trading frameworks and methodologies have been devised to enhance the efficacy of this strategy. This paper proposes an approach based on cointegration and correlation, but ultimately utilizes cointegration to identify the pair trading investment strategy that can be applied to technology sector stocks and metal futures in China over the last five years. The top five ranked portfo-lios are then evaluated. The results indicate that the pairs with Silver and Copper exhibited positive returns, while the pair with Palladium yielded negative returns.

The impact of COVID-19 uncertainties on energy market volatility: Evidence from the US markets

This research investigates the influence of the COVID-19 on the returns of energy indexes in the US using daily time series data of WTI and Brent markets for the January 2020 – March 2022 period. The findings reveal compelling evidence of the effects of the COVID-19 on the volatility of energy commodity indexes in the US. Nevertheless, the magnitude of this impact varies across different volatility regimes. Notably, the WTI crude oil exhibits more substantial effects during periods of lower volatility characterised by fewer COVID-19 cases, potentially attributed to market control measures. In contrast, the Brent crude oil displays a more pronounced impact of the COVID-19 during turbulent periods, attributed to the market's openness and the prevalence of speculative participants. The study suggests that participants in the Brent market, driven by a desire to capitalise on price differentials, intensify their activities during turbulent periods, contributing to increased volatility during successive waves of high COVID-19 cases. The observed structural differences between the WTI and Brent commodity markets carry significant policy implications for investors in the energy sector.

Multimarket contact and price discrimination

Theoretical and empirical studies have demonstrated that multimarket contact facilitates tacit collusion and higher prices. In this study, we examine how multimarket contact influences firms' use of price discrimination. First, we demonstrate theoretically that additional coordination can lead firms to increase or reduce price discrimination, depending on underlying market factors. Next, we empirically investigate price differentials in the U.S. airline industry, employing a new instrumental variables approach to isolate the effects of multimarket contact. We find that multimarket contact results in larger differences in fare levels amongst consumers purchasing higher-priced tickets but smaller fare differences amongst those purchasing lower-priced tickets. Consistent with our theoretical model, multimarket contact more strongly influences fares on less concentrated routes. The findings emphasize the importance of accounting for cross-market or network structure as well as within-market structure when modeling market conduct and performance or when evaluating potential merger effects.

Price disparities in the housing market vs. transportation costs for households. A case study of real estate development projects in Szczecin

Motives: Land situated on the outskirts of cities and even outside their borders is being seized for urban development, as well as for housing purposes. Properties in such locations are usually significantly cheaper than those located in the city centers. However, living in a suburban location often entails higher commuting, education, and entertainment costs. Therefore, the following question arises from a property buyer’s point of view: is it more economically advantageous to purchase more expensive property in a downtown district or a cheaper one located peripherally and incur higher transportation costs? Aim: The purpose of the study was to compare the transportation costs incurred by households in peripheral locations with the property price differentials between suburban and central city districts. Results: The study covered the city of Szczecin. Data for the study were obtained from public sources and analyzed with tools such as the payback period, simple rate of return, net present value (NPV) for 10 and 20 years, and internal rate of return (IRR) for 10 and 20 years. The results indicate that in certain cases, very high commuting costs might encourage potential buyers to consider the purchase of more expensive property in a central city location where these costs are significantly lower or not necessary.

Tobacco Taxation in Spain: A tax laggard with a brighter possible future.

In recent years tobacco taxation in Spain has regressed, with its Tobacconomics tax scorecard falling from 3.9 points (out of 5) in 2014, to only 2.625 in 2020. The objective of this research is to provide a detailed analysis of the causes behind this deterioration and identify possible ways forward for reversing this trend. A retrospective 2014-2022 analysis of manufactured cigarettes (FM) and roll-your-own tobacco (RYO) markets including tax structure/rates, affordability, retail price gaps across products, and price differentials with bordering countries. A market level simulation model to 2028 studied the impact of various tax policy scenarios on smoking prevalence, premature deaths averted, smoking intensity, product substitution, government revenue, sales, and industry profit. A lack of tax increases in a context of inflation and income growth during the past 8 years means FM and RYO have become 13% more affordable, with a constant differential of €2 between 20 FM and RYO sticks, and the price gap between Spain and neighbouring France increased. Modelling of two realistic reform scenarios that reduce/eliminate the price gap between FM and RYO suggest substantial increases in government revenues and up to 700,000 fewer smokers and 210,000 fewer premature deaths. Current European Union legislation on tobacco taxes leaves ample room for much needed tobacco tax reform. For the sake of both public health and the economy, Spain should increase its Minimum Excise Tax. This would not only save lives, but also bring much needed revenue for the government. The stance of Spain on tobacco taxes has deteriorated recently. This study argues that the failure of successive governments to raise minimum taxes in an inflationary context has made tobacco products more affordable, and quantifies the improvements in smoking prevalence and excise revenue that would accrue if the authorities act urgently increasing rates within realistic limits.Spain is representative of European countries where government inaction has rendered minimum tobacco taxes obsolete. Given the postponement of the revision of the European Union Tobacco Tax Directive, this study highlights the need to act unilaterally within the existing legal framework.

Budget impact analysis of biosimilar natalizumab in the US.

Biosimilars provide an opportunity for a more sustainable and cost-effective treatment for multiple sclerosis (MS). This study evaluated the potential financial impact of implementing a formulary change from reference to biosimilar natalizumab (NTZ) from the US commercial payer perspective. The budget impact of transitioning to biosimilar NTZ for the treatment of relapsing-remitting MS (RRMS) was estimated over a 3-year time horizon based on real-world dosing. Additional scenario analyses were conducted by varying the price differential of biosimilar NTZ. The target population was estimated from a 1-million-member hypothetical commercial health plan. Model inputs were drug acquisition costs and treatment-related and patient coinsurance costs. Budget impact and cost savings per member per year were calculated by assuming a biosimilar uptake of 10% in year 1 to 20% in year 3. Over 3 years, 255 patients were estimated to be treated with high-efficacy disease-modifying therapies for RRMS. The inclusion of biosimilar NTZ onto a formulary would result in cumulative cost savings to payers of $452,611 over 3 years, with mean savings per treated member per year of $1179, $1769, and $2359 in years 1, 2, and 3, respectively. One-way sensitivity analyses indicated that budget impact results were most sensitive to drug acquisition costs of both reference and biosimilar NTZ. Adoption of biosimilar NTZ can yield considerable cost savings to US health plans that could result in increased treatment access for patients with RRMS.

Risk-aware participation in day-ahead and real-time balancing markets for energy storage systems

The increasing volatility of electricity prices due to increased uncertain renewable energy generation gives rise to interesting short-term arbitrage opportunities for Energy Storage Systems (ESS) operators. Whereas prior research has shown the possibility to exploit inter-temporal arbitrage opportunities in the real-time balancing market, this paper formulates a two-stage optimization methodology that allows ESS operators to also engage in inter-market arbitrage by participating in both the day-ahead and real-time balancing markets. However, the effectiveness of such a strategy is heavily influenced by expected inter-market price differentials, which is known to be difficult to predict when it involves the imbalance price. To address this issue, we propose a risk-averse approach by incorporating the conditional value at risk in the ESS objective function. The proposed methodology is applied to a case study of the Belgian electricity market, where we demonstrate the effectiveness of (i) the combined market participation compared to an ESS participating in either market, and (ii) the risk-aware methodology by showcasing improved ex-post out-of-sample profit performance of a risk-averse compared to a risk-neutral ESS.

Implications of the EU ETS on the level-playing field between carbon capture storage & utilisation

System modelling efforts have shown that carbon capture is a key technology to enable a cost-effective reduction of hard-to-abate emissions in energy-intensive industries. The CO2 that is captured can either be utilised (CCU), or stored with carbon capture and storage (CCS). This paper examines the implications of both European carbon pricing mechanisms (ETS I & ETS II) on the level-playing field between CCS and CCU investments. Our contribution is threefold. First, we develop an equilibrium model that enables us to mimic market outcomes under different regulatory conditions. With a numerical case study applied to a fuel production chain, the model confirms that the current ETS regulation can have an adverse effect on CCU uptake. Especially with zero or low ETS II prices a lock-in effect can occur on CCS, potentially prolonging conventional refinery activities. Second, we propose an alternative approach to better integrate CCUS into the EU ETS. Results show that this approach maintains the level-playing field between CCU and CCS, regardless of any carbon price differentials. That results in a closer to Pareto optimal outcome in terms of welfare and emission abatement. Third, we present an analytic analysis to express the CCUS trade-off from a theoretical point of view. This provides generalised and concrete insights into how EU ETS influences the profitability and likelihood of CCUS. Our results help policymakers to gain a better understanding of the impact of ETS regulations on decarbonisation efforts in the industry.

Transitioning to a Hydrogen Economy: Exploring the Viability of Adapting Natural Gas Pipelines for Hydrogen Transport through a Case Study on Compression vs. Looping

The growing importance of hydrogen as an energy carrier in a future decarbonised energy system has led to a surge in its production plans. However, the development of infrastructure for hydrogen delivery, particularly in the hard-to-abate sectors, remains a significant challenge. While constructing new pipelines entails substantial investment, repurposing existing pipelines offers a cost-effective approach to jump-starting hydrogen networks. Many European countries and, more recently, other regions are exploring the possibility of utilising their current pipeline infrastructure for hydrogen transport. Despite the recent efforts to enhance the understanding of pipeline compatibility and integrity for hydrogen transportation, including issues such as embrittlement, blend ratios, safety concerns, compressor optimisation, and corrosion in distribution networks, there has been limited or no focus on pipeline expansion options to address the low-energy density of hydrogen blends and associated costs. This study, therefore, aims to explore expansion options for existing natural gas high-pressure pipelines through additional compression or looping. It seeks to analyse the corresponding cost implications to achieve an affordable and sustainable hydrogen economy by investigating the utilisation of existing natural gas pipeline infrastructure for hydrogen transportation as a cost-saving measure. It explores two expansion strategies, namely pipeline looping (also known as pipeline reinforcement) and compression, for repurposing a segment of a 342 km × 36 inch existing pipeline, from the Escravos–Lagos gas pipeline system (ELPS) in Nigeria, for hydrogen transport. Employing the Promax® process simulator tool, the study assesses compliance with the API RP 14E and ASME B31.12 standards for hydrogen and hydrogen–methane blends. Both expansion strategies demonstrate acceptable velocity and pressure drop characteristics for hydrogen blends of up to 40%. Additionally, the increase in hydrogen content leads to heightened compression power requirements until approximately 80% hydrogen in the blends for compression and a corresponding extension in looping length until around 80% hydrogen in the blend for looping. Moreover, the compression option is more economically viable for all investigated proportions of hydrogen blends for the PS1–PS5 segment of the Escravos–Lagos gas pipeline case study. The percentage price differentials between the two expansion strategies reach as high as 495% for a 20% hydrogen proportion in the blend. This study offers valuable insights into the technical and economic implications of repurposing existing natural gas infrastructure for hydrogen transportation.

Price differences within retail gasoline markets

This paper characterizes fueling stations' pricing strategies to study price differentials within retail gasoline markets. We use a unique dataset with stations' locations and daily gasoline prices in the major cities of the continental U.S. to classify cycler and non-cycler stations. We exploit station-level variability in pricing behavior within retail gasoline markets to show that cyclers charge about 3.5¢ lower gasoline prices than non-cyclers, on average. Additionally, we confirm an almost biweekly duration of the station-level cycling behavior. Finally, we provide evidence of the relationship between consumer search and the intra-market pricing strategy heterogeneity.

Real exchange rates and manufacturing exports in emerging economies: the role of sectoral heterogeneity and product complexity

The empirical evidence on the relationship between the real exchange rate and export performance in emerging economies is inconclusive. In this paper, we present evidence that one reason for this inconclusiveness is the use of real exchange rate (RER) measures that do not consider the heterogeneity between economic sectors. To this end, we calculate a unique sectoral bilateral RER index (SBRER) for 12 Latin American economies, which considers the variation of producer price differentials and bilateral nominal exchange rates across 21 manufacturing sectors and 38 trade partners between 2001–2018, and to estimate the effect of SBRER movements on manufacturing exports. The regression results show that the SBRER is a significant determinant of aggregate manufacturing exports, whereas the bilateral RER is not significant. Moreover, sectoral export elasticities indicate that mainly sectors with low levels of product complexity and, to a lesser extent, those of medium complexity are affected by RER movements. These findings show that it is important to consider sectoral heterogeneity when estimating RER export elasticities from a macroeconomic perspective.

Abstract 4: Unveiling the Economic Burden of Stroke in the European Union: Comparisons With the USA

Introduction: Stroke places a significant economic impact on health and social care systems, as well as indirect costs through premature retirement, and absenteeism, reducing productivity and economic output, and necessitating care for patients from friends and family. This study aims to provide novel and up- to-date evidence on the economic burden of stroke across 27 EU countries allowing to draw comparisons with the USA. Methods: Stroke-related costs were estimated for 27 EU countries in 2021. Country-specific resource use was estimated using aggregate data on morbidity, mortality, health, social and informal care, apportioned to stroke using patient-level data based on responses from 140,000 participants. Resource use was valued using country-specific unit costs. To allow for meaningful comparisons with the 2018 American Heart Association (AHA) estimates of stroke costs in the USA, costs are reported in US $ adjusted for price differentials and inflation. Results: In 2021, excluding long-term care costs as not included in AHA estimates, stroke cost the EU health care systems $39 billion (2% of health expenditure). Within this total, there was wide variation in per-capita healthcare costs (ranging from $30 in Malta to $177 in Austria), with that for the EU being $87. In the USA, comparable stroke-related healthcare costs accounted for 2% ($35 billion) of US health expenditure, and $108 per capita (comparable to Belgium - $103). In the EU-27, productivity losses due to early mortality were estimated at $8 billion ($19 per capita), compared to $21 billion in the USA ($65 per capita). Long-term nursing home care costs were є21 billion in the EU-27, driving the proportion of total healthcare expenditure due to stroke to 3%. Unpaid care for stroke patients accounted for $38 billion in the EU-27, with absence from work costing the EU economy an additional $4 billion. The total costs of stroke for the EU-27 were $110 billion. Conclusions: This study provides contemporary estimates of the wide-ranging impact of stroke on all aspects of 27 European countries’ economies, allowing for meaningful comparisons with the USA. The data help inform evidence based polices to reduce the impact of stroke, promoting care access and better health outcomes and economic sustainability.

Unraveling ESG Ambiguity, Price Reaction, and Trading Volume

We introduce an asset pricing model that integrates investors’ ESG preferences and their ambiguous attitudes towards firms’ ESG performance, influenced by inconsistent ESG ratings from diverse rating agencies. Our model, considering unregulated ESG reporting and variations in agency assessments, reveals significant dynamics in asset pricing. We discover that stronger belief in high ESG scores among investors increases asset holdings and prices, whereas increased perceived ESG ambiguity negatively impacts these metrics. Crucially, the model demonstrates that the ESG ambiguity attitudes parameter and the degree of perceived ESG ambiguity are inversely related to asset prices. Specifically, we find that heightened perceived ESG ambiguity and a higher ESG ambiguity attitudes parameter are associated with lower asset prices, reflecting in increased trading volumes and widened price differentials. This research offers vital insights into how investors’ preferences and perceptions about ESG influence asset pricing.

Racial Housing Price Differentials and Neighborhood Segregation

Racial Housing Price Differentials and Neighborhood Segregation

Grid aided combined heat and power generation system for rural village in north China plain using improved PSO algorithm

The rural areas of North China Plain, an important grain producer in China, are endowed with abundant new energy resources such as biomass, solar, and wind energy. The revitalization of the rural villages is confronted with the shortage of clean and low carbon energy supply. This work proposes a multi-energy complementary distributed energy system (DES) tailored for daily energy consumption in a typical scattered village on the basis of the field survey results. The geothermal heat pump, photovoltaic system (PV), biomass gasification equipment, and other energy conversion devices are integrated in the DES model. The state grid is used as a fundamental ensuring resource to improve the robustness of the system. The improved particle swarm optimization (PSO) algorithm is employed to determine the optimal unit capacity configuration by examining investment cost, payback period, system self-sufficiency, accommodation rate, and annual CO2 emissions. The main available renewable energy resources are biomass and solar energy with the annual amount of 1608.9 tons and 1679 kW h/m2. The heat, gas, and electricity load account for 76.84%, 3.14%, and 20.02%, respectively. Based on the daily peak-to-valley price differentials in Beijing of over $0.15/kWh, DES optimization was carried out with PSO module in MATLAB software. The cost of the energy supply with DES, Scenario 3, was compared with that of the mere grid and renewable systems, Scenario 1 and Scenario 2. The direct DES cost is $0.52 million with the internal rate of return of 8.46%, resulting in a payback period of 6.15 years. The overall system self-sufficiency index except for grid achieved a value of 0.42. The application of the DES lead to energy costs of residents and annual carbon emission reduction by 32.5% and more than 3800 tons, respectively, compared to grid-only energy consumption, showcasing the feasibility of grid-aided combined heat and electricity production in rural areas.

The causes of differences between the average agricultural land prices of hungarian counties

Currently, there are significant differences between the average per hectare agricultural land prices of Hungarian counties. In this study, I endeavour to identify the causes of the price differentials by using a regression model. The data employed in the analysis relate to the years 2013, 2016 and 2020, and cover all of the 19 counties. The average yields of the main arable crops and the per capita GDP values of counties have a vigorous positive effect on land prices. Much like in numerous pieces of earlier research, it is demonstrated that larger average farm size also increases the price of agricultural land. Land prices are considerably higher in lowland areas with a smaller density of settlements than in otherwise similar but hilly or montainous regions, where there are more settlements. During the 2010s, agricultural land prices in Hungary grew dynamically. The rise of per capita GDP, average farm size and farm output per unit area played an important part in this, but perhaps the most consequential factor was the rise of the yields of the chief arable crops. The spectacular growth trend of average yields is attributable, above all, to the advance of agrotechnology. Since the fall of communism, Hungarian agriculture has shifted more and more towards intensive cereal production. Apparently, technological development has enhanced the profitability of cereal production relative to the other branches of agriculture, and it has thus raised the values of plots located in areas most suitable for arable farming.

Wind Turbines and Property Values: A Meta-Regression Analysis

A key concern for property owners about the set up of proximate wind turbines is the potential devaluation of their property. However, there is no consensus in the empirical hedonic literature estimating this price-distance relationship. It remains unclear if the proximity to wind turbines reduces, increases, or has no significant effect on property values. This article addresses this ambiguity, combining 720 estimates from 25 hedonic pricing studies in a first comprehensive meta-analysis on this topic. Using Bayesian model averaging techniques and novel publication bias correction methods, I calculate an average of the reported estimates that is free from misspecification and publication bias. In economic terms, I find an average reduction in property values of -0.68%\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$-0.68\\%$$\\end{document} for properties 1.89 miles away, which turns to zero beyond 2.8 miles. Next to publication selection, the studies’ ability to control for confounding factors such as pre-existing price differentials and spatial effects explains the variance in reported effect sizes.