Limits to arbitrage in electricity markets: A case study of MISO

John Birge, Ali Hortacsu, Ignacia Mercadal and J. Michael Pavlin

Energy Economics, 2018, vol. 75, issue C, 518-533

Abstract: We study the case of financial traders in the Midwest electricity market, where they are expected to arbitrage price differences that result in inefficiencies. Using exogenous variation in financial trading from the financial crisis and a period of high transaction costs, we show speculators had only a weak effect. Moreover, while arbitrage was restricted by transaction costs imposed by regulation, some financial players bet in exactly the opposite direction of the pricing gap, sustaining large losses while doing so. We show this is consistent with price manipulation intended to increase the value of a related instrument that bets on local price differences (FTRs).

Keywords: Virtual traders; Financial transmission rights; Wholesale electricity markets; Financial traders; Market manipulation (search for similar items in EconPapers)
JEL-codes: G1 L1 L9 Q4 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:75:y:2018:i:c:p:518-533

DOI: 10.1016/j.eneco.2018.08.024

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