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Periodic Sequences of Arbitrage: A Tale of Four Currencies

  • 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)

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.

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File URL: http://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/10-19_final.pdf
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Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1019.

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Length: 31 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:str:wpaper:1019
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  1. Haskel, Jonathan & Wolf, Holger, 2001. " The Law of One Price--A Case Study," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 545-58, December.
  2. Alan M. Taylor, 2000. "A Century of Purchasing-Power Parity," NBER Working Papers 8012, National Bureau of Economic Research, Inc.
  3. Osler, Carol L., 2005. "Stop-loss orders and price cascades in currency markets," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 219-241, March.
  4. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
  5. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
  6. Covrig, Vicentiu & Melvin, Michael, 2002. "Asymmetric information and price discovery in the FX market: does Tokyo know more about the yen?," Journal of Empirical Finance, Elsevier, vol. 9(3), pages 271-285, August.
  7. Charles Engel & Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
  8. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," The Journal of Business, University of Chicago Press, vol. 51(3), pages 453-75, July.
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