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Arbitrage in the Foreign Exchange Market: Turning on the Microscope

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  • Akram, Qaisar Farooq
  • Rime, Dagfinn
  • Sarno, Lucio

Abstract

This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency. The analysis unveils that: i) short-lived violations of CIP arise; ii) the size of CIP violations can be economically significant; iii) their duration is, on average, high enough to allow agents to exploit them, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6878.

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Date of creation: Jun 2008
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Handle: RePEc:cpr:ceprdp:6878

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Keywords: arbitrage; covered interest rate parity; exchange rates; foreign exchange microstructure;

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