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Deviations from Triangular Arbitrage Parity in Foreign Exchange and Bitcoin Markets
[working paper]
Corporate Editor
Institut für Höhere Studien (IHS), Wien
Abstract This paper applies recently developed procedures to monitor and date so-called “financial market dislocations”, defined as periods in which substantial deviations from arbitrage parities take place. In particular, we focus on deviations from the triangular arbitrage parity for exchange rate triplets... view more
This paper applies recently developed procedures to monitor and date so-called “financial market dislocations”, defined as periods in which substantial deviations from arbitrage parities take place. In particular, we focus on deviations from the triangular arbitrage parity for exchange rate triplets from a cointegration perspective. Due to increasing attention on and importance of mispricing in the market for cryptocurrencies, we include the cryptocurrency Bitcoin in addition to fiat currencies. We do not find evidence for substantial deviations from the triangular arbitrage parity when only traditional fiat currencies are concerned, but document significant deviations from triangular arbitrage parities in the newer markets for Bitcoin. We confirm the importance of our results for portfolio strategies by showing that a currency portfolio that trades based on our detected break-points outperforms a simple buy-and-hold strategy.... view less
Keywords
financial market; foreign exchange; currency
Classification
National Economy
Free Keywords
Kryptowährung
Document language
English
Publication Year
2020
City
Wien
Page/Pages
47 p.
Series
IHS Working Paper, 17
Status
Published Version; reviewed