Detecting Arbitrage in the Foreign Exchange Market

24 Pages Posted: 5 May 2018

See all articles by Zhenyu Cui

Zhenyu Cui

Stevens Institute of Technology - School of Business

Wenhan Qian

Stevens Institute of Technology - School of Business

Stephen Michael Taylor

New Jersey Institute of Technology

Lingjiong Zhu

University of Minnesota - Minneapolis

Date Written: April 16, 2018

Abstract

In this paper, we propose a theoretical and computational framework for the detection and identification of (triangular) arbitrage opportunities among spot currency exchange rates in a foreign exchange market. We obtain sufficient conditions for excluding the triangular arbitrage opportunities in a market with or without market frictions, i.e. transaction costs. Then we propose a very efficient computational approach not only to detect triangular arbitrage opportunities in real time but also to identify the combinations of currencies that lead to the arbitrage opportunity from market data. In numerical studies, we utilize empirical data of foreign currency exchange rates to substantiate our theoretical findings and demonstrate the efficiency of the proposed computational approach.

Keywords: Foreign Exchange, Toxic Arbitrage, Triangular Arbitrage, Perron-Frobenius Theorem

JEL Classification: C58, G12, G13

Suggested Citation

Cui, Zhenyu and Qian, Wenhan and Taylor, Stephen Michael and Zhu, Lingjiong, Detecting Arbitrage in the Foreign Exchange Market (April 16, 2018). Stevens Institute of Technology School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3165151 or http://dx.doi.org/10.2139/ssrn.3165151

Zhenyu Cui (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://sites.google.com/site/zhenyucui86/publications

Wenhan Qian

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Stephen Michael Taylor

New Jersey Institute of Technology ( email )

University Heights
Newark, NJ 07102
United States

Lingjiong Zhu

University of Minnesota - Minneapolis ( email )

206 Church Street SE
Minneapolis, MN 55455
United States

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