Arbitrage in the Foreign Exchange Market: Turning on the Microscope
Dagfinn Rime () and
Lucio Sarno ()
No 42, SIFR Research Report Series from Institute for Financial Research
This paper investigates the presence and characteristics of arbitrage opportunities in the foreign exchange market 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, obtained from Reuters on special order. We provide evidence on the frequency, size and duration of round-trip and one-way arbitrage opportunities in real time. The analys is unveils the existence of numerous short-lived arbitrage opportunities, whose size is economically significant across exchange rates and comparable across different maturities of the instruments involved in arbitrage. The duration of arbitrage opportunities is, on average, high enough to allow agents to exploit deviations from the law of one price, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.
Keywords: Exchange rates; arbitrage; foreign exchange microstructure (search for similar items in EconPapers)
JEL-codes: F31 F41 G14 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fin, nep-fmk, nep-ifn and nep-rmg
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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 (2008)
Working Paper: Arbitrage in the foreign exchange market: Turning on the microscope (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sifrwp:0042
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