Arbitrage in the Foreign Exchange Market: Turning on the Microscope

Lucio Sarno, Dagfinn Rime and Qaisar Akram

No 6878, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency. The analysis unveils that: i) short-lived violations of CIP arise; ii) the size of CIP violations can be economically significant; iii) their duration is, on average, high enough to allow agents to exploit them, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.

Keywords: Arbitrage; Covered interest rate parity; Exchange rates; Foreign exchange microstructure (search for similar items in EconPapers)
JEL-codes: F31 F41 G14 G15 (search for similar items in EconPapers)
Date: 2008-06
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mst and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (222)

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Related works:
Journal Article: Arbitrage in the foreign exchange market: Turning on the microscope (2008)
Working Paper: Arbitrage in the Foreign Exchange Market: Turning on the Microscope (2006)
Working Paper: Arbitrage in the foreign exchange market: Turning on the microscope (2005)
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