THE MIRAGE OF TRIANGULAR ARBITRAGE IN THE SPOT FOREIGN EXCHANGE MARKET
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 op...
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| Veröffentlicht in: | International Journal of Theoretical and Applied Finance (IJTAF) 2009-12, Vol.12 (8), p.1105-1123 |
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| container_title | International Journal of Theoretical and Applied Finance (IJTAF) |
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| creator | FENN, DANIEL J. HOWISON, SAM D. MCDONALD, MARK WILLIAMS, STACY JOHNSON, NEIL F. |
| description | 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. |
| doi_str_mv | 10.1142/S0219024909005609 |
| format | Article |
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| identifier | ISSN: 0219-0249 |
| ispartof | International Journal of Theoretical and Applied Finance (IJTAF), 2009-12, Vol.12 (8), p.1105-1123 |
| issn | 0219-0249 1793-6322 1793-6322 |
| language | eng |
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| source | World Scientific Journals (Tsinghua Mirror); RePEc; World Scientific Journals |
| subjects | Arbitrage Daylight overdrafts Foreign exchange Foreign exchange market Foreign exchange markets Investment policy Market efficiency Prices Profit maximization Securities trading Simulation Simulation techniques Studies Traders triangular arbitrage |
| title | THE MIRAGE OF TRIANGULAR ARBITRAGE IN THE SPOT FOREIGN EXCHANGE MARKET |
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