Arbitrage in the Foreign Exchange Market: Turning on the Microscope

36 Pages Posted: 20 Aug 2008

See all articles by Qaisar Farooq Akram

Qaisar Farooq Akram

Norges Bank

Dagfinn Rime

BI Norwegian Business School

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2008

Abstract

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.

Keywords: arbitrage, covered interest rate parity, exchange rates, foreign exchange microstructure

JEL Classification: F31, F41, G14, G15

Suggested Citation

Akram, Qaisar Farooq and Rime, Dagfinn and Sarno, Lucio, Arbitrage in the Foreign Exchange Market: Turning on the Microscope (June 2008). CEPR Discussion Paper No. DP6878. Available at SSRN: https://ssrn.com/abstract=1240188

Qaisar Farooq Akram

Norges Bank ( email )

Bankplassen 2
P.O. Box 1179
Oslo, N-0107
Norway

Dagfinn Rime

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
+47-46410507 (Phone)

HOME PAGE: http://home.bi.no/dagfinn.rime/

Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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