Toxic Arbitrage *

@inproceedings{Foucault2014ToxicA,
  title={Toxic Arbitrage *},
  author={Thierry Foucault and Roman Kozhan and Wing Wah Tham},
  year={2014}
}
Short lived arbitrage opportunities can arise when the prices of asset pairs do not adjust to information at the same speed. These opportunities are toxic because they expose investors to the risk of trading with arbitrageurs at stale quotes. Hence, more frequent toxic arbitrage opportunities and a faster arbitrageurs’ response to these opportunities can impair liquidity. We provide supporting evidence using data on triangular arbitrage in currency markets. In our sample, a 1% increase in the… CONTINUE READING

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