EconPapers    
Economics at your fingertips  
 

A new wavelet-based ultra-high-frequency analysis of triangular currency arbitrage

Nikola Gradojevic, Deniz Erdemlioglu and Ramazan Gencay

Economic Modelling, 2020, vol. 85, issue C, 57-73

Abstract: We develop a new framework to characterize the dynamics of triangular (three-point) arbitrage in electronic foreign exchange markets. To examine the properties of arbitrage, we propose a wavelet-based regression approach that is robust to estimation errors, measurement bias and persistence. Relying on this wavelet-based (denoising) inference, we consider various liquidity and market risk indicators to predict arbitrage in a unique ultra-high-frequency exchange rate data set. We find strong empirical evidence that limit order book, realized volatility and cross-correlations help forecast triangular arbitrage profits. The estimates are statistically significant and relevant for investors such that on average 80−100 arbitrage opportunities exist with a short duration (100−500 ms) on a daily basis. Our analysis also reveals that triangular arbitrage opportunities are counter-cyclical at ultra-high-frequency levels: arbitrage returns tend to increase (decrease) in periods when volatility risk and correlations are relatively low (high). We show that liquidity-driven microstructure measures, however, appear to be more powerful in exploiting arbitrage profits when compared to market-driven factors.

Keywords: Foreign exchange markets; Triangular arbitrage; Limit order book; Wavelets (search for similar items in EconPapers)
JEL-codes: G15 G17 F31 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999318319072
Full text for ScienceDirect subscribers only

Related works:
Working Paper: A new wavelet-based ultra-high-frequency analysis of triangular currency arbitrage (2020)
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:eee:ecmode:v:85:y:2020:i:c:p:57-73

DOI: 10.1016/j.econmod.2019.05.006

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2020-06-30
Handle: RePEc:eee:ecmode:v:85:y:2020:i:c:p:57-73