Identifying Foreign Exchange Arbitrage Opportunities through Matrix Approach

11 Pages Posted: 11 Mar 2008

See all articles by Ming Ma

Ming Ma

School of Management and Economics - Beijing Institute of Technology

Date Written: January 11, 2008

Abstract

Since Chacholiades (1971) determines the necessary condition and sufficient condition for the establishment of consistent exchange rates, Moosa (2002) shows that the effect of triangular arbitrage in the forward market is similar to the combined effect of triangular arbitrage in the spot market and covered interest arbitrage. Akram, Rime and Sarno (2007) provide real-time evidence on the frequency, size and duration of arbitrage opportunities and deviations opportunities and deviations from the law of one price in the foreign exchange market. Here an N*N matrix approach is employed to identify foreign exchange arbitrage opportunities. Foreign exchange quotes are re-arranged as matrix, the eigenvalue λmax is an indicator for arbitrage opportunities, and the correspondent eigenvector facilitates seeking of arbitrage path, much easier and faster than enumeration method. Due to the difficulty of obtaining real-time data, simulation data are used to test the model.

Keywords: Foreign Exchange, Arbitrage, Matrix Approach

JEL Classification: F31, G12, G15

Suggested Citation

Ma, Ming, Identifying Foreign Exchange Arbitrage Opportunities through Matrix Approach (January 11, 2008). Available at SSRN: https://ssrn.com/abstract=1096549 or http://dx.doi.org/10.2139/ssrn.1096549

Ming Ma (Contact Author)

School of Management and Economics - Beijing Institute of Technology ( email )

5 South Zhongguancun street
Center for Energy and Environmental Policy Researc
Beijing, Haidian District 100081
China

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