Covered Interest Arbitrage in Exchange Rate Forecasting Markets

Authors:
Feng Wang;Yuanxiang Li;Cheng Yang
Affiliations:
State Key Lab. of Software Engineering, Wuhan University, 430072, China Wuhan;State Key Lab. of Software Engineering, Wuhan University, 430072, China Wuhan;State Key Lab. of Software Engineering, Wuhan University, 430072, China Wuhan
Venue:
FAW '09 Proceedings of the 3d International Workshop on Frontiers in Algorithmics
Year:
2009

Citing 3
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Abstract

The non-existence of arbitrage in an efficient foreign exchange markets is widely believed. In this paper, we deploy a forecasting model to predict foreign exchange rates and apply the covered interest parity to evaluate the possibility of an arbitrage opportunity. Surprisingly, we substantiate the existence of covered interest arbitrage opportunities in the exchange rate forecasting market even with transaction costs. This also implies the inefficiency of the market and potential market threats of profit-seeking investors. In our experiments, a hybrid model GA-BPNN which combines adaptive genetic algorithm with back-propagation neural network is used for exchange rate forecasting.