Arbitrage in the foreign exchange market: turning on the microscope
Akram, Qaisar Farooq, Rime, Dagfinn and Sarno, Lucio (2008) Arbitrage in the foreign exchange market: turning on the microscope. Discussion Paper. London: Centre for Economic Policy Research (Great Britain). Discussion paper (Centre for Economic Policy Research (Great Britain)) (No.687).
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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.
|Item Type:||Working or Discussion Paper (Discussion Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Warwick Business School|
|Library of Congress Subject Headings (LCSH):||Arbitrage, Foreign exchange rates, Interest rates, Financial instruments|
|Series Name:||Discussion paper (Centre for Economic Policy Research (Great Britain))|
|Publisher:||Centre for Economic Policy Research (Great Britain)|
|Place of Publication:||London|
|Official Date:||June 2008|
|Number of Pages:||36|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Institute for Quantitative Investment and Research (Great Britain) (INQUIRE)|
|Version or Related Resource:||Akram, Q.F., Rime, D. and Sarno, L. (2008). Arbitrage in the foreign exchange market: Turning on the microscope. Journal of International Economics, 76(2), pp. 237-253. http://wrap.warwick.ac.uk/id/eprint/28761|
Aliber R.Z., Chowdhry B., Yan S., 2003. Some evidence that a Tobin tax on foreign
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