Double exponential instability of triangular arbitrage systems

DOI10.3934/DCDSB.2013.18.349MaRDI QIDQ1943302zbMATH OpenOpenAlexFDO

Authors Rod Cross, Victor Kozyakin

Publication date 19 March 2013

Published in Discrete and Continuous Dynamical Systems. Series B (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1204.3422

zbMATH Keywords

asynchronous systemslimits to arbitragematrix productsrecurrent sequences

Mathematics Subject Classification ID

Norms of matrices, numerical range, applications of functional analysis to matrix theory (15A60) Auctions, bargaining, bidding and selling, and other market models (91B26) Special types of economic markets (including Cournot, Bertrand) (91B54) Macroeconomic theory (monetary models, models of taxation) (91B64) Statistical methods; risk measures (91G70)

Abstract: If financial markets displayed the informational efficiency postulated in the efficient markets hypothesis (EMH), arbitrage operations would be self-extinguishing. The present paper considers arbitrage sequences in foreign exchange (FX) markets, in which trading platforms and information are fragmented. In Kozyakin et al. (2010) and Cross et al. (2012) it was shown that sequences of triangular arbitrage operations in FX markets containing 4 currencies and trader-arbitrageurs tend to display periodicity or grow exponentially rather than being self-extinguishing. This paper extends the analysis to 5 or higher-order currency worlds. The key findings are that in a 5-currency world arbitrage sequences may also follow an exponential law as well as display periodicity, but that in higher-order currency worlds a double exponential law may additionally apply. There is an "inheritance of instability" in the higher-order currency worlds. Profitable arbitrage operations are thus endemic rather that displaying the self-extinguishing properties implied by the EMH.

Recommendations

• Periodic sequences of arbitrage: a tale of four currencies
• Triangular arbitrage as an interaction among foreign exchange rates
• Detecting and identifying arbitrage in the spot foreign exchange market
• Ultra-high-frequency algorithmic arbitrage across international index futures
• Arbitrage in stationary markets

Cited in

(8)

• Triangular arbitrage as an interaction among foreign exchange rates
• Consensus in asynchronous multiagent systems. II: Method of joint spectral radius
• Periodic sequences of arbitrage: a tale of four currencies
• Ultra-high-frequency algorithmic arbitrage across international index futures
• Detecting and identifying arbitrage in the spot foreign exchange market
• Compositional Analysis of Exchange Rates
• No‐arbitrage matrices of exchange rates: Some characterizations
• A note on the theory of fast money flow dynamics

This page was built for publication: Double exponential instability of triangular arbitrage systems

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q1943302)