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The exchange rate effect of multi-currency risk arbitrage

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Published in Journal of International Money and Finance. 2014, vol. 47, p. 304-331
Abstract Carry trade arbitrage strategies typically involve multiple cur- rencies. Limits to arbitrage in such a setting not only slow the adjustment to the fundamental equilibrium, but can also generate transitory over- or undershooting of each exchange rate in accor- dance with the marginal risk contribution of each speculative position to the overall arbitrage risk. The paper uses a natural experiment to identify a particular global arbitrage opportunity and shows that arbitrage risk hedging modifies the exchange rate dynamics in the predicted manner. New spectral methods are applied to obtain a more precise inference on the cross-sectional trading pattern of the arbitrageurs
Keywords SpeculationLimited arbitrageHedgingExchange rate disconnec
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HAU, Harald. The exchange rate effect of multi-currency risk arbitrage. In: Journal of International Money and Finance, 2014, vol. 47, p. 304-331. https://archive-ouverte.unige.ch/unige:87709

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Deposited on : 2016-09-23

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