Does arbitrage always improve market efficiency? Theory and evidence from sequential markets for electricity

Since the 1990s, many countries have deregulated their electricity markets. Electricity producers and distributors participate in auctions in forward and spot markets, which determine production allocation and wholesale prices. A key policy question for the United States and the rest of the world is whether financial traders should be allowed to participate in the auctions to arbitrage differences between forward and spot prices. Does arbitrage benefit consumers? Does it lead to more efficient allocation of production resources? This article summarises Ito and Reguant (2016), and address those questions from theoretical and empirical perspectives by examining the Iberian electricity market.

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