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An Analysis of the Effects of Market Con¬straints on Simple Multi-currency Arbi¬trage Strategies

Author

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  • Blenman, Lloyd P.

    (University of North Carolina-Charlotte Belk College of Business Department of Finance)

Abstract

Necessary conditions are derived for the simultaneous existence of ineffective triangular arbitrage and effective higher-order arbitrage in currency markets. Such conditions are possible when market constraints, in the form of differential rates of taxation on currency trades, inhibit effective triangular arbitrage but do not block higher-order strategies. All effective higher-order arbitrage strategies are shown to be market-completing and satisfy profit reversal criteria. It is also shown that it is neither necessary nor sufficient for any elementary trade to be explicitly subsidized for profitable higher-order strategies to exist. However, all higher-order arbitrage trades reflect a redistribution of resources from the rate-setting and tax authorities to currency arbitrageurs.

Suggested Citation

  • Blenman, Lloyd P., 1995. "An Analysis of the Effects of Market Con¬straints on Simple Multi-currency Arbi¬trage Strategies," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 48(4), pages 475-495.
    • Handle: RePEc:ris:ecoint:0385
    as

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