THE MIRAGE OF TRIANGULAR ARBITRAGE IN THE SPOT FOREIGN EXCHANGE MARKET

Daniel J. Fenn (), Sam D. Howison (), Mark McDonald (), Stacy Williams () and Neil F. Johnson ()
Additional contact information
Daniel J. Fenn: Mathematical and Computational Finance Group, Mathematical Institute, University of Oxford, Oxford OX1 3LB, UK
Sam D. Howison: Mathematical and Computational Finance Group, Mathematical Institute, University of Oxford, Oxford OX1 3LB, UK
Mark McDonald: FX Research and Trading Group, HSBC Bank, 8 Canada Square, London E14 5HQ, UK
Stacy Williams: FX Research and Trading Group, HSBC Bank, 8 Canada Square, London E14 5HQ, UK
Neil F. Johnson: Physics Department, University of Miami, Coral Gables, Florida 33146, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 08, 1105-1123

Abstract: We investigate triangular arbitrage within the spot foreign exchange market using high-frequency executable prices. We show that triangular arbitrage opportunities do exist, but that most have short durations and small magnitudes. We find intra-day variations in the number and length of arbitrage opportunities, with larger numbers of opportunities with shorter mean durations occurring during more liquid hours. We demonstrate further that the number of arbitrage opportunities has decreased in recent years, implying a corresponding increase in pricing efficiency. Using trading simulations, we show that a trader would need to beat other market participants to an unfeasibly large proportion of arbitrage prices to profit from triangular arbitrage over a prolonged period of time. Our results suggest that the foreign exchange market is internally self-consistent and provide a limited verification of market efficiency.

Keywords: Foreign exchange market; triangular arbitrage (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024909005609
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:12:y:2009:i:08:n:s0219024909005609

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024909005609

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().