Triangular arbitrage: Difference between revisions

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==Evidence for triangular arbitrage==

Studies of high-frequency [[exchange rate]] data have found that mis-pricings[[mispricing]]s do arise in the [[foreign exchange market]] so that triangular arbitrage appears possible.<ref name="Fenn et al. 2009">{{Cite journal | title = The Mirage of Triangular Arbitrage in the Spot Foreign Exchange Market | journal = International Journal of Theoretical and Applied Finance | volume = 12 | issue = 8 | date = 2009 | pages = 1105-1123 | author = Fenn, Daniel J. | author2 = Howison, Sam D. | author3 = McDonald, Mark | author4 = Williams, Stacy | author5 = Johnson, Neil F. | url = http://www.worldscinet.com/ijtaf/12/1208/S0219024909005609.html | accessdate = 2011-07-06}}</ref> MostHowever, most of these apparent arbitrage opportunities, however, typically only exist for 1 or 2 seconds and potentially only yield very small profits (usually less than US$100 USD on a US$1 million USD trade).

There are variations in the number of triangular arbitrage opportunities that occur during different hours of the 24 hour foreign exchange trading day. Perhaps slightly counter-intuitively, more triangular arbitrage opportunities arise during hours when [[market liquidity]] is at its highest; for example, from about 8-10 AM GMT when both Asian and European foreign exchange traders are active, and from 2-4 PM GMT when both European and American traders are active. During more liquid periods, triangular arbitrage opportunities also tend to exist for shorter durations than during less liquid periods. The reason for these differences is that in liquid periods the bid-ask spread is narrower and prices move around at a higher frequency due to the large volume of trading. This results in more price misalignments and thus more potential arbitrages. The high trade frequency, however, also ensures that the mis-pricings are quickly traded away and thus that any arbitrage opportunities are short-lived.