COVID-19 Effects on Arbitrage Trading in the Energy Market

Abstract

This paper investigates the effects of coronavirus disease 2019 (COVID-19) on the performance of arbitrage trading in the energy market using daily data covering the period between 1 January 2015 and 5 December 2021. The investigation was achieved by utilizing a parametric pairs-trading model, where pairs of energy-related securities, including futures, stocks and ETFs traded in the United States, are formed. The empirical results suggest that the out-of-sample performances of pair trading declined sharply in the face of COVID-19. Dividing the whole data sample into two sub-samples, we found that the strategy performed well before COVID-19 but yielded poor results in the pandemic era. The analysis presented in this paper could serve as a benchmark for arbitrage-based trading models in the energy market during the pandemic.