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Periodic Sequences of Arbitrage: A Tale of Four Currencies

Author

Listed:
  • Rod Cross

    (Department of Economics, University of Strathclyde)

  • Victor Kozyakin

    (Institute for Information Transmission Problems, Russian Academy of Sciences,Bolshoj Karetny lane 19, Moscow 127994 GSP-4, Russia)

  • Brian O'Callaghan

    (Department of Applied Mathematics University College Cork, Ireland)

  • Alexei Pokrovskii

    (Department of Applied Mathematics University College Cork, Ireland)

  • Alexey Pokrovskiy

    (London School of Economics and Political Science)

Abstract

This paper investigates arbitrage chains involving four currencies and four foreign ex-change trader-arbitrageurs. In contrast with the three-currency case, we find that arbitrage operations when four currencies are present may appear periodic in nature, and not involve smooth convergence to a "balanced" ensemble of exchange rates in which the law of one price holds. The goal of this article is to understand some interesting features of sequences of arbitrage operations, features which might well be relevant in other contexts in finance and economics.

Suggested Citation

  • 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.
    • Handle: RePEc:str:wpaper:1019
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    Cited by:

    1. is not listed on IDEAS
    2. Rod Cross & Victor Kozyakin, 2012. "Fact and Fiction in FX Arbitrage Processes," Working Papers 1211, University of Strathclyde Business School, Department of Economics.
    3. Alexander Mikhailovich Batkovskiy & Viktor Antonovich Nesterov & Olga Olegovna Reshetova & Elena Georgievna Semenova & Alena Vladimirovna Fomina, 2017. "Dynamic Model of Optimal Production Control in a Hysteretic Behaviour of Economic Agents," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 355-379.
    4. repec:edn:sirdps:378 is not listed on IDEAS
    5. Rod Cross & Victor Kozyakin, 2012. "Double Exponential Instability of Triangular Arbitrage Systems," Papers 1204.3422, arXiv.org, revised Jun 2012.

    More about this item

    Keywords

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    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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