Deviations from Triangular Arbitrage Parity in Foreign Exchange and Bitcoin Markets

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 use a cointegration perspective to focus on deviations from the triangular arbitrage parity for exchange rate triplets. Due to increasing attention on and importance of mispricing in the market for cryptocurrencies, we include the cryptocurrency Bitcoin in addition to fiat currencies in our analysis. We do not find evidence for substantial deviations from the triangular arbitrage parity when only traditional fiat currencies are considered, but document significant deviations from triangular arbitrage parities in the newer market for Bitcoin. We tentatively 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.

Arbitrageurs in the Bitcoin Ecosystem: Evidence from User-Level Trading Patterns in the Mt. Gox Exchange Platform

“…Gox aggregate data, finding that shocks in that market did not affect rates in conventional venues and that the efficiency observed in the market could be explained by the presence of arbitrageurs. Other studies indicate the presence of triangular arbitrage opportunities during the period from 2013 to 2017 (Pichl and Kaizoji, 2017;Reynolds et al, 2021;Pieters and Vivanco, 2015;Makarov and Schoar, 2020;Yu and Zhang, 2018;Hirano et al, 2018;Nan and Kaizoji, 2019). Remarkably, Reynolds et al (2021) show that persistent mispricings arise only when Bitcoin is used as a vehicle currency, finding no evidence of deviations from parity when considering the implied rate between traditional fiat currencies.…”

Does bitcoin liquidity resemble the liquidity of other financial assets?

“…Alexander et al (2020) show that derivatives on the unregulated BitMEX exchange lead spot prices and effectively hedge against spot price volatility. Reynolds et al (2018) find that newer bitcoin currency–exchange pairs create mispricing, allowing triangular arbitrage profit opportunities. Moreover, Griffin and Shams (2018) suggest that Tether, a digital currency pegged to the US dollar (USD), is used to manipulate the prices of other cryptocurrencies.…”

The Arbitrage Strategy for Cryptocurrency: Principle and Feasibility Based on Blockchain Technology

“…In addition, the current international society the central bank has been in full swing since the study of digital currency, there are a total of 81 countries around the world (accounted for more than 90% of global GDP) is the central bank digital currency, digital currency also has many advantages of block chain, encryption money want to be with the advantages of building block chain to replace the existing monetary system idea has failed. Besides, it would also deal another blow to cryptocurrencies [12].…”

“…However, the stock is endorsed by the listed company, and the appreciation and fall of the stock can be analyzed to a certain extent on the company's various business measures. Moreover, the stock also has a limit up and down mechanism, to a certain extent to ensure the stability of the stock market [12,13]. Taking advantage of price differences between two different but related assets, the logic of cross-variety arbitrage is to find the relatively stable relationship between commodities of different varieties but with a certain correlation.…”