The mirage of triangular arbitrage in the spot foreign exchange market

Daniel J. Fenn, Sam D. Howison, Mark McDonald, Stacy Williams, Neil F Johnson

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

We investigate triangular arbitrage within the spot foreign exchange market using high-frequency executable prices. We show that triangular arbitrage opportunities do exist, but that most have short durations and small magnitudes. We find intra-day variations in the number and length of arbitrage opportunities, with larger numbers of opportunities with shorter mean durations occurring during more liquid hours. We demonstrate further that the number of arbitrage opportunities has decreased in recent years, implying a corresponding increase in pricing efficiency. Using trading simulations, we show that a trader would need to beat other market participants to an unfeasibly large proportion of arbitrage prices to profit from triangular arbitrage over a prolonged period of time. Our results suggest that the foreign exchange market is internally self-consistent and provide a limited verification of market efficiency.

Original languageEnglish (US)
Pages (from-to)1105-1123
Number of pages19
JournalInternational Journal of Theoretical and Applied Finance
Volume12
Issue number8
DOIs
StatePublished - Dec 2009

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Arbitrage
Foreign exchange market
Simulation
Traders
Market efficiency
Proportion
Pricing efficiency
Profit

Keywords

  • Foreign exchange market
  • Triangular arbitrage

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Finance

Cite this

The mirage of triangular arbitrage in the spot foreign exchange market. / Fenn, Daniel J.; Howison, Sam D.; McDonald, Mark; Williams, Stacy; Johnson, Neil F.

In: International Journal of Theoretical and Applied Finance, Vol. 12, No. 8, 12.2009, p. 1105-1123.

Research output: Contribution to journalArticle

Fenn, Daniel J. ; Howison, Sam D. ; McDonald, Mark ; Williams, Stacy ; Johnson, Neil F. / The mirage of triangular arbitrage in the spot foreign exchange market. In: International Journal of Theoretical and Applied Finance. 2009 ; Vol. 12, No. 8. pp. 1105-1123.
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