Circular Arbitrage Detection Using Graphs

8 Pages Posted: 7 Nov 2018

See all articles by Zhenyu Cui

Zhenyu Cui

Stevens Institute of Technology - School of Business

Stephen Michael Taylor

New Jersey Institute of Technology

Date Written: October 15, 2018

Abstract

We propose a novel graph-theoretic method for the detection of circular arbitrage in foreign exchange (FX) markets and discuss and demonstrate runtime improvements of this algorithm over the brute force approach. An application on empirical currency bid/ask price data validates this technique as well as provides an example of increased computational efficiency, especially in the case where a large number of currencies are considered. Using minute level market data for all G10 currency pairs, we demonstrate the efficiency of the algorithm as well as potential returns of higher order circular arbitrage trades. Finally, several potential extensions are discussed.

Keywords: Foreign Exchange, Arbitrage, Triangular Arbitrage, Max Plus Product

JEL Classification: C63

Suggested Citation

Cui, Zhenyu and Taylor, Stephen Michael, Circular Arbitrage Detection Using Graphs (October 15, 2018). Stevens Institute of Technology School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3267020 or http://dx.doi.org/10.2139/ssrn.3267020

Zhenyu Cui

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

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

Stephen Michael Taylor (Contact Author)

New Jersey Institute of Technology ( email )

University Heights
Newark, NJ 07102
United States

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