Economy – Quantitative Finance – Statistical Finance
Scientific paper
2008-12-04
International Journal of Theoretical and Applied Finance, Vol. 12, Issue 8: 1105-1123 (2009)
Economy
Quantitative Finance
Statistical Finance
Scientific paper
10.1142/S0219024909005609
We investigate triangular arbitrage within the spot foreign exchange market using high-frequency executable prices. We show that triangular arbitrage opportunities do exist, but that most have short durations and small magnitudes. We find intra-day variations in the number and length of arbitrage opportunities, with larger numbers of opportunities with shorter mean durations occurring during more liquid hours. We demonstrate further that the number of arbitrage opportunities has decreased in recent years, implying a corresponding increase in pricing efficiency. Using trading simulations, we show that a trader would need to beat other market participants to an unfeasibly large proportion of arbitrage prices to profit from triangular arbitrage over a prolonged period of time. Our results suggest that the foreign exchange market is internally self-consistent and provide a limited verification of market efficiency.
Fenn Daniel J.
Howison Sam D.
Johnson Neil F.
McDonald Mark
Williams Stacy
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