16,628 research outputs found
The Mirage of Triangular Arbitrage in the Spot Foreign Exchange Market
We investigate triangular arbitrage within the spot foreign exchange market
using high-frequency executable prices. We show that triangular arbitrage
opportunities do exist, but that most have short durations and small
magnitudes. We find intra-day variations in the number and length of arbitrage
opportunities, with larger numbers of opportunities with shorter mean durations
occurring during more liquid hours. We demonstrate further that the number of
arbitrage opportunities has decreased in recent years, implying a corresponding
increase in pricing efficiency. Using trading simulations, we show that a
trader would need to beat other market participants to an unfeasibly large
proportion of arbitrage prices to profit from triangular arbitrage over a
prolonged period of time. Our results suggest that the foreign exchange market
is internally self-consistent and provide a limited verification of market
efficiency
Price discovery in spot and futures markets: a reconsideration
We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage operations to have an impact on the return dynamics. We estimate the model using quote midpoints, and we modify the model to account for time-varying transaction costs. We find that the futures market leads in the process of price discovery. The lead of the futures market is more pronounced in the presence of arbitrage signals. Thus, when the deviation between the spot and the futures market is large, the spot market tends to adjust to the futures market
Market efficiency today
This CFS Working Paper has been presented at the CFSsymposium "Market Efficiency Today" held in Frankfurt/Main on October 6, 2005. In 2004 the Center for Financial Studies (CFS) in cooperation with the Johann Wolfgang Goethe University, Frankfurt/Main established an international academic prize, which is to be known as The Deutsche Bank Prize in Financial Economics. The prize will honor an internationally renowned researcher who has excelled through influential contributions to research in the fields of finance and money and macroeconomics, and whose work has lead to practice and policy-relevant results. The Deutsche Bank Prize in Financial Economics has been awarded for the first time in October 2005. The prize, sponsored by the Stiftungsfonds Deutsche Bank im Stifterverband für die Deutsche Wissenschaft, carries a cash award of € 50,000. The prize will be awarded every two years and the prize holder will be appointed a "Distinguished Fellow" of the CFS. The role of media partner for the Deutsche Bank Prize in Financial Economics is to be filled by the internationally renowned publication, The Economist and the Handelsblatt, the leading German-language financial and business newspaper
The Economics of Strategic Opportunity
As emphasized by Barney (1986), any explanation of superior profitability must account for why the resources supporting such profitability could have been acquired for a price below their rent generating capacity. Building upon the literature in economics on coordination failures and incomplete markets, we suggest a framework for analyzing such strategic factor market inefficiencies. Our point of departure is that a strategic opportunity exists whenever prices fail to reflect the value of a resource's best use. This paper examines the challenges of imputing a resource's value in the absence of explicit price guidance and suggests the likely characteristics of strategic opportunities. Our framework also suggests that the discovery of strategic opportunity is often a matter of serendipity and access to relevant idiosyncratic resources. This latter observation provides prescriptive advice, although the analysis also explains why more detailed guidance has to be firm specific.
Statistical Arbitrage with Default and Collateral
In this paper we study the implications of the absence of statistical arbitrage opportunities (SAO) in a two-period incomplete market economy where default is allowed but there are collateral requirements. We study the existence of state price deflators and the existence of a solution for the individual optimality problem, obtaining modified versions of the fundamental theorems of asset pricing. Then, we address the existence of equilibrium.
Diversity and Arbitrage in a Regulatory Breakup Model
In 1999 Robert Fernholz observed an inconsistency between the normative
assumption of existence of an equivalent martingale measure (EMM) and the
empirical reality of diversity in equity markets. We explore a method of
imposing diversity on market models by a type of antitrust regulation that is
compatible with EMMs. The regulatory procedure breaks up companies that become
too large, while holding the total number of companies constant by imposing a
simultaneous merge of other companies. The regulatory events are assumed to
have no impact on portfolio values. As an example, regulation is imposed on a
market model in which diversity is maintained via a log-pole in the drift of
the largest company. The result is the removal of arbitrage opportunities from
this market while maintaining the market's diversity.Comment: 21 page
Communication Strategies for Low-Latency Trading
The possibility of latency arbitrage in financial markets has led to the
deployment of high-speed communication links between distant financial centers.
These links are noisy and so there is a need for coding. In this paper, we
develop a gametheoretic model of trading behavior where two traders compete to
capture latency arbitrage opportunities using binary signalling. Different
coding schemes are strategies that trade off between reliability and latency.
When one trader has a better channel, the second trader should not compete.
With statistically identical channels, we find there are two different regimes
of channel noise for which: there is a unique Nash equilibrium yielding ties;
and there are two Nash equilibria with different winners.Comment: Will appear in IEEE International Symposium on Information Theory
(ISIT), 201
Inter-market Arbitrage in Sports Betting
Unlike the existing literature on sports betting, which concentrates on arbitrage within a single market, this paper examines inter-market arbitrage by searching for arbitrage opportunities through combining bets at the bookmaker and the exchange market. Using the posted odds of eight different bookmakers and the corresponding odds traded at a well-known bet exchange for 5,478 football matches played in the top-five European leagues during three seasons, we find (only) ten intra-market arbitrage opportunities. However, we find 1,450 cases in which a combined bet at the bookmaker as well as at the exchange yields a guaranteed positive return. Further analyses reveal that inter-market arbitrage emerges from different levels of informational efficiency between the two markets.sports betting, inter-market arbitrage
Financial Stability, New Macro Prudential Arrangements and Shadow Banking: Regulatory Arbitrage and Stringent Basel I I I Regulations
Despite Basel III’s efforts to address capital and liquidity requirements, will the risks linked to
regulatory arbitrage increase as a result of Basel III’s more stringent capital and liquidity rules?
As well as Basel III reforms which are geared towards greater facilitation of financial stability on a
macro prudential basis, further efforts and initiatives aimed at mitigating systemic risks – hence
fostering financial stability, have been promulgated through the establishment of the De Larosiere
Group, the European Systemic Risk Board, and a working group comprising of “international standard
setters and authorities responsible for the translation of G20 commitments into standards.”
This paper aims to investigate the impact of Basel III on shadow banking and its facilitation of
regulatory arbitrage as well as consider the response of various jurisdictions and standard setting
bodies to aims and initiatives aimed at improving their macro prudential frameworks. Furthermore, it
will also aim to illustrate why immense work is still required at European level – as regards efforts to
address systemic risks on a macro prudential basis. This being the case even though significant efforts
and steps have been taken to address the macro prudential framework. In so doing, the paper will also
attempt to address how coordination within the macro prudential framework – as well as between
micro and macro prudential supervision could be enhanced
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