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Genetic Algorithm for Arbitrage with More than Three Currencies

DEFI Working Paper No. 12-04

13 Pages Posted: 19 Jul 2012  

Adrian Fernandez-Perez

Auckland University of Technology

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Simon Sosvilla-Rivero

Complutense Institute for International Studies

Date Written: July 17, 2012

Abstract

We develop a genetic algorithm that is able to find the optimal sequence of exchange rates that maximizes arbitrage profits with more than three currencies, being both the triangular arbitrage and the direct exchange rate two special cases of the proposed algorithm. Applying the algorithm to the most traded currencies, we find average profits ranking from 4.5083% to 0.3162% for changing 1 USD for EUR with respect to the direct exchange rate, for different transaction costs, during the period October 2000-April 2012. Our results also suggest that the arbitrage profits increased just after the subprime crisis in summer of 2007 and that they are higher when the market is less liquid.

Keywords: arbitrage, foreign exchange market, genetic algorithm

JEL Classification: C45, G14, G15

Suggested Citation

Fernandez-Perez, Adrian and Fernández Rodríguez, Fernando and Sosvilla-Rivero, Simon, Genetic Algorithm for Arbitrage with More than Three Currencies (July 17, 2012). DEFI Working Paper No. 12-04. Available at SSRN: https://ssrn.com/abstract=2111317 or http://dx.doi.org/10.2139/ssrn.2111317

Adrian Fernandez-Perez

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 9 921 9999 (Phone)
+64 9 921 9940 (Fax)

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

Campus de Tafira
E-35017 Las Palmas
Spain
+34 928 45 18 02 (Phone)
+34 928 45 18 29 (Fax)

Simon Sosvilla-Rivero (Contact Author)

Complutense Institute for International Studies ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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