Abstract: Inspired by the initial success and eventual failure of the Norwegian energy trader Einar Aas aiming at exploiting dynamic patterns in the spread between Nordic and German electricity futures, we investigate the question of whether there is evidence for possible arbitrage from engaging in the Nordic and German energy markets simultaneously and the possibility of constructing a trading strategy that ultimately beats the markets.
To do this, we first assess the risk premium and relevant Sharpe values for the two markets and observe significant differences. This is followed by a discussion as to how far the different risk premia and Sharpe values alone are evidence of arbitrage. The answer is, they are not. However, we then show that an intelligently chosen long-short strategy constructed in the Einar Aas spirit can generate a positive alpha in the CAPM sense, hence providing evidence of arbitrage.
In a related investigation we look at crude oil and natural gas futures contracts and the presence of a type of seasonality that has been given very little to no attention in the literature, we call it trading time seasonality. Such seasonality is exposed through the futures trading time, not its maturity time, nor the underlying spot price. As we show, it can be linked to seasonality in the pricing kernel, but the latter can't explain it fully. Its relationship to arbitrage and CAPM violation is investigated, and its presence is confirmed for natural gas and crude oil futures markets using descriptive analysis, Kruskal Wallis testing and CAPM methodology. We provide an informal discussion around possible reasons for the effect and identify seasonal hedging pressure and market sentiments as such.
