Deviations from Triangular Arbitrage Parity in Foreign Exchange and Bitcoin Markets

Reynolds, Julia; Sögner, LeopoldORCID: and Wagner, Martin (July 2020) Deviations from Triangular Arbitrage Parity in Foreign Exchange and Bitcoin Markets. IHS Working Paper Series 17, 47 p.

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Abstract or Table of Contents

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.

Item Type: IHS Series
Keywords: Triangular Arbitrage Parity, Foreign Exchange Markets, Cryptocurrencies, Cointegration, Monitoring
Classification Codes (e.g. JEL): G12, G15, C22, C32
Research Units: Macroeconomics and Economic Policy
Status: Published
Date Deposited: 07 Jul 2020 13:41
Last Modified: 08 Jul 2020 07:15

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