A new wavelet-based ultra-high-frequency analysis of triangular currency arbitrage

Gradojevic, Nikola; Erdemlioglu, Deniz; Gençay, Ramazan

Document type :

Compte-rendu et recension critique d'ouvrage

DOI :

10.1016/j.econmod.2019.05.006

Title :

A new wavelet-based ultra-high-frequency analysis of triangular currency arbitrage

Author(s) :

Gradojevic, Nikola [Auteur]
Lille économie management - UMR 9221 [LEM]
Erdemlioglu, Deniz [Auteur]
Lille économie management - UMR 9221 [LEM]
Gençay, Ramazan [Auteur]

Journal title :

Economic Modelling

Pages :

57-73

Publisher :

Elsevier

Publication date :

2020-02

ISSN :

0264-9993

English keyword(s) :

Foreign exchange markets
Triangular arbitrage
Limit order book
Wavelets

HAL domain(s) :

Sciences de l'Homme et Société/Gestion et management

English abstract : [en]

We develop a new framework to characterize the dynamics of triangular (three-point) arbitrage in electronic foreign exchange markets. To examine the properties of arbitrage, we propose a wavelet-based regression approach ...
Show more >We develop a new framework to characterize the dynamics of triangular (three-point) arbitrage in electronic foreign exchange markets. To examine the properties of arbitrage, we propose a wavelet-based regression approach that is robust to estimation errors, measurement bias and persistence. Relying on this wavelet-based (denoising) inference, we consider various liquidity and market risk indicators to predict arbitrage in a unique ultra-high-frequency exchange rate data set. We find strong empirical evidence that limit order book, realized volatility and cross-correlations help forecast triangular arbitrage profits. The estimates are statistically significant and relevant for investors such that on average 80−100 arbitrage opportunities exist with a short duration (100−500 ms) on a daily basis. Our analysis also reveals that triangular arbitrage opportunities are counter-cyclical at ultra-high-frequency levels: arbitrage returns tend to increase (decrease) in periods when volatility risk and correlations are relatively low (high). We show that liquidity-driven microstructure measures, however, appear to be more powerful in exploiting arbitrage profits when compared to market-driven factors.Show less >

Language :

Anglais

Popular science :

Non

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