Deviations from triangular arbitrage parity in foreign exchange and Bitcoin markets

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IHS Working Paper ; No. 17

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; International Financial Markets ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
• Subject: Triangular Arbitrage Parity ; Foreign Exchange Markets ; Cryptocurrencies ; Cointegration ; Monitoring

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Reynolds, Julia E. ; Sögner, Leopold ; Wagner, Martin
• Event: Veröffentlichung
• (who): Institut für Höhere Studien - Institute for Advanced Studies (IHS)
• (where): Vienna
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/222605
• Last update: 10.03.2025, 11:42 AM CET