The microscopic relationships between triangular arbitrage and cross-currency correlations in a simple agent based model of foreign exchange markets.

ABSTRACT: Foreign exchange rates movements exhibit significant cross-correlations even on very short time-scales. The effect of these statistical relationships become evident during extreme market events, such as flash crashes. Although a deep understanding of cross-currency correlations would be clearly beneficial for conceiving more stable and safer foreign exchange markets, the microscopic origins of these interdependencies have not been extensively investigated. This paper introduces an agent-based model which describes the emergence of cross-currency correlations from the interactions between market makers and an arbitrager. The model qualitatively replicates the time-scale vs. cross-correlation diagrams observed in real trading data, suggesting that triangular arbitrage plays a primary role in

SUBMITTER: Ciacci A 

PROVIDER: S-EPMC7313750 | biostudies-literature | 2020

REPOSITORIES: biostudies-literature