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Deviations from Triangular Arbitrage Parity in Foreign Exchange and Bitcoin Markets

Julia Reynolds, Leopold Soegner and Martin Wagner
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Julia Reynolds: Institute of Finance, Universita della Svizzera Italiana, Lugano
Leopold Soegner: Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, Vienna Graduate School of Finance and NYU Abu Dhabi

No 17, IHS Working Paper Series from Institute for Advanced Studies

Abstract: This paper applies recently developed procedures to monitor and date so-called “financial market dislocations”, defined as periods in which substantial deviations from arbitrage parities take place. In particular, we focus on deviations from the triangular arbitrage parity for exchange rate triplets from a cointegration perspective. Due to increasing attention on and importance of mispricing in the market for cryptocurrencies, we include the cryptocurrency Bitcoin in addition to fiat currencies. We do not find evidence for substantial deviations from the triangular arbitrage parity when only traditional fiat currencies are concerned, but document significant deviations from triangular arbitrage parities in the newer markets for Bitcoin. We confirm the importance of our results for portfolio strategies by showing that a currency portfolio that trades based on our detected break-points outperforms a simple buy-and-hold strategy.

Keywords: Triangular Arbitrage Parity; Foreign Exchange Markets; Cryptocurrencies; Cointegration; Monitoring (search for similar items in EconPapers)
JEL-codes: G12 G15 C22 C32 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2020-07
New Economics Papers: this item is included in nep-pay
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http://www.ihs.ac.at/publications/eco/ihswps-17.pdf First version, 2020 (application/pdf)

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