The exchange rate effect of multi-currency risk arbitrage

Harald Hau

Journal of International Money and Finance, 2014, vol. 47, issue C, 304-331

Abstract: Carry trade arbitrage strategies typically involve multiple currencies. Limits to arbitrage in such a setting not only slow the adjustment to the fundamental equilibrium, but can also generate transitory over- or undershooting of each exchange rate in accordance with the marginal risk contribution of each speculative position to the overall arbitrage risk. The paper uses a natural experiment to identify a particular global arbitrage opportunity and shows that arbitrage risk hedging modifies the exchange rate dynamics in the predicted manner. New spectral methods are applied to obtain a more precise inference on the cross-sectional trading pattern of the arbitrageurs.

Keywords: Speculation; Limited arbitrage; Hedging; Exchange rate disconnect (search for similar items in EconPapers)
JEL-codes: G11 G14 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: The Exchange Rate Effect of Multi-Currency Risk Arbitrage (2012)
Working Paper: The Exchange Rate Effect of Multi-Currency Risk Arbitrage (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:47:y:2014:i:c:p:304-331

DOI: 10.1016/j.jimonfin.2014.05.001

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