University of the Ryukyus
Faculty of Global and Regional Studies
1 Senbaru, Nishihara
Institutional Affiliation: University of the Ryukyus
NBER Working Papers and Publications
|January 2020||Execution Risk and Arbitrage Opportunities in the Foreign Exchange Markets|
with Takatoshi Ito, Misako Takayasu, Hideki Takayasu: w26706
With the high-frequency data of firm quotes in the transaction platform of foreign exchanges, arbitrage profit opportunities—in the forms of a negative bid-ask spread of a currency pair and triangular transactions involving three currency pairs—can be detected to emerge and disappear in the matter of seconds. The frequency and duration of such arbitrage opportunities have declined over time, most likely due to the emergence of algorithmic trading. When a human trader detects such an arbitrage opportunity and places orders for multiple transactions—two in negative spreads and three in triangular arbitrage—there is no guarantee all of those orders are fulfilled in a fraction of one second. Thus, the arbitrageur has to consider execution risk, when he/she/it detects the emergence of such an o...
|November 2012||Free Lunch! Arbitrage Opportunities in the Foreign Exchange Markets|
with Takatoshi Ito, Misako Takayasu, Hideki Takayasu: w18541
Using the "firm" quotes obtained from the tick-by-tick EBS (electronic broking system that is a major trading platform for foreign exchanges) data, it is found that risk-free arbitrage opportunities--free lunch--do occur in the foreign exchange markets, but it typically last only a few seconds. "Free lunch" is in the form of (a) negative spreads in a currency pair and (b) triangular arbitrage relationship involving three currency pairs. The latter occur much more often than the former. Such arbitrage opportunities tend to occur when the markets are active and volatile. Over the 12-year, tick-data samples, the number of free lunch opportunities has dramatically declined and the probability of the opportunities disappearing within one second has steadily increased. The size of expected profi...