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Fact and Fiction in FX Arbitrage Processes

Author

Listed:
  • 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.

Suggested Citation

  • Rod Cross & Victor Kozyakin, 2012. "Fact and Fiction in FX Arbitrage Processes," Working Papers 1211, University of Strathclyde Business School, Department of Economics.
    • Handle: RePEc:str:wpaper:1211
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    References listed on IDEAS

    as
    1. Martin D. D. Evans & Richard K. Lyons, 2017. "Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 11, pages 457-475, World Scientific Publishing Co. Pte. Ltd..
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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