Deviations from Triangular Arbitrage Parity in Foreign Exchange and Bitcoin Markets

Julia Reynolds (), Leopold Sögner () and Martin Wagner
Additional contact information
Julia Reynolds: U.S. Securities and Exchange Commission
Leopold Sögner: Department of Economics and Finance, Institute for Advanced Studies, Vienna

Central European Journal of Economic Modelling and Econometrics, 2021, vol. 13, issue 2, 105-146

Abstract: This paper applies recently developed procedures to monitor and date so-called “financial market dislocations”, defined as periods in which substantial deviations from arbitrage parities take place. In particular, we use a cointegration perspective to focus on deviations from the triangular arbitrage parity for exchange rate triplets. Due to increasing attention on and importance of mispricing in the market for cryptocurrencies, we include the cryptocurrency Bitcoin in addition to fiat currencies in our analysis. We do not find evidence for substantial deviations from the triangular arbitrage parity when only traditional fiat currencies are considered, but document significant deviations from triangular arbitrage parities in the newer market for Bitcoin. We tentatively confirm the importance of our results for portfolio strategies by showing that a currency portfolio that trades based on our detected break-points outperforms a simple buy-and-hold strategy.

Keywords: triangular arbitrage parity; foreign exchange markets; cryptocurrencies; cointegration; monitoring (search for similar items in EconPapers)
JEL-codes: C22 C32 G12 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Working Paper: Deviations from Triangular Arbitrage Parity in Foreign Exchange and Bitcoin Markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:psc:journl:v:13:y:2021:i:2:p:105-146

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