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Fact and Fiction in FX Arbitrage Processes

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Author Info

  • Rod Cross

    ()
    (Department of Economics, University of Strathclyde)

  • Victor Kozyakin

    ()
    (Institute for Information Transmission Problems, Russian Academy of Sciences)

Abstract

The 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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File URL: http://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/2012/12-11-Final.pdf
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Bibliographic Info

Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1211.

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Length: 14 pages
Date of creation: Jul 2012
Date of revision:
Publication status: Published
Handle: RePEc:str:wpaper:1211

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Related research

Keywords: Triangular Arbitrage; FX Markets; Periodic Sequences; Asynchronous Systems; The Fear Index;

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  1. Q. Farooq Akram, & Dagfinn Rime & Lucio Sarno, 2005. "Arbitrage in the foreign exchange market: Turning on the microscope," Working Paper 2005/12, Norges Bank.
  2. Rod Cross & Victor Kozyakin & Brian O'Callaghan & Alexei Pokrovskii & Alexey Pokrovskiy, 2010. "Periodic Sequences of Arbitrage: A Tale of Four Currencies," Working Papers 1019, University of Strathclyde Business School, Department of Economics.
  3. 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.).
  4. Rod Cross & Victor Kozyakin, 2012. "Double Exponential Instability of Triangular Arbitrage Systems," Papers 1204.3422, arXiv.org, revised Jun 2012.
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