Algorithmic Trading Strategy Making: Algorithms and Applications

Arbitrage Strategy

Arbitrage is an activity which traders or investors take advantage of the disequilibrium existed in the financial market to benefit themselves. It widely exists in the modern financial economy. The existence of the disequilibrium implies that the market goes against the law of one price, and as a matter of fact, arbitrage is a process which arbitragers make use of these opportunities and make the market move to equilibrium. The disequilibrium of financial market has many types of arbitrage. The exchange arbitrage involves the simultaneous purchase and sale of a currency in different foreign exchange markets. Arbitrage becomes profitable whenever the price of a currency in one market differs from that in another market. In order to keep the equilibrium of the exchange rate trading market, arbitrage is not available or taken as a close position.

In this section, we will discuss three kinds of arbitrage in the current market. One is the exchange arbitrage based on covered interest parity. The second one is statistical arbitrage. The third one is information arbitrage.