Fact and Fiction in FX Arbitrage Processes
AbstractThe efficient markets hypothesis implies that arbitrage opportunities in markets such as those for foreign exchange (FX) would be, at most, short-lived. The present paper surveys the fragmented nature of FX markets, revealing that information in these markets is also likely to be fragmented. The "quant"Â workforce in the hedge fund featured in The Fear Index novel by Robert Harris would have little or no reason for their existence in an EMH world. The four currency combinatorial analysis of arbitrage sequences contained in Cross, Kozyakin, O'Callaghan, Pokrovskii and Pokrovskiy (2012) is then considered. Their results suggest that arbitrage processes, rather than being self-extinguishing, tend to be periodic in nature. This helps explain the fact that arbitrage dealing tends to be endemic in FX markets.
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Bibliographic InfoPaper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1211.
Length: 14 pages
Date of creation: Jul 2012
Date of revision:
Publication status: Published
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More information through EDIRC
Triangular Arbitrage; FX Markets; Periodic Sequences; Asynchronous Systems; The Fear Index;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- F31 - International Economics - - International Finance - - - Foreign Exchange
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1019, University of Strathclyde Business School, Department of Economics.
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- Cross, Rod & Kozyakin, Victor & O’Callaghan, Brian & Pokrovskii, Alexei & Pokrovskiy, Alexey, 2010. "Periodic Sequences of Arbitrage: A Tale of Four Currencies," SIRE Discussion Papers 2010-66, Scottish Institute for Research in Economics (SIRE).
- Alain Chaboud & Benjamin Chiquoine & Erik Hjalmarsson & Clara Vega, 2009. "Rise of the machines: algorithmic trading in the foreign exchange market," International Finance Discussion Papers 980, Board of Governors of the Federal Reserve System (U.S.).
- Rod Cross & Victor Kozyakin, 2012. "Double Exponential Instability of Triangular Arbitrage Systems," Papers 1204.3422, arXiv.org, revised Jun 2012.
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