Liquidity and Arbitrage in the Foreign Exchange Market: Statistical Significance and Economic Value
Speaker
Abstract
| We study Covered Interest Parity (CIP) arbitrage violations in the foreign exchange market and their relationship with market liquidity using a novel and unique dataset of tick-by-tick firm quotes for all financial instruments involved in the arbitrage strategy. The empirical analysis shows that CIP deviations are statistically significant and larger in size when the aggregate market liquidity is poorer. The economic value of CIP deviations is large, but arbitrage profits only accrue to traders who are able to negotiate low trading costs. The results are robust to stale pricing in the less liquid instruments and to the existence of interday and intraday seasonality in market liquidity and CIP deviations. |
| Contact information: |
| Myra Lissenberg |
