Genetic Algorithm for Arbitrage with More than Three Currencies

Adrián Fernández-Pérez, Fernando Fernández-Rodríguez, Simón Sosvilla-Rivero

Department of Quantitative Methods, Complutense University of Madrid, Madrid, Spain.
Department of Quantitative Methods, University of Las Palmas de Gran Canaria, Las Palmas de Gran Canaria, Spain.

DOI: 10.4236/ti.2012.33025                

Abstract

We develop a genetic algorithm that is able to find the optimal sequence of exchange rates that maximizes arbitrage profits with more than three currencies, being both the triangular arbitrage and the direct exchange rate two special cases of the proposed algorithm. Applying the algorithm to the most traded currencies, we find average profits ranking from 4.5083% to 0.3162% for changing 1 USD for EUR with respect to the direct exchange rate, for different transaction costs, during the period October 2000-April 2012. Our results also suggest that the arbitrage profits increased just after the subprime crisis in summer of 2007 and that they are higher when the market is less liquid.

Keywords

Arbitrage; Foreign Exchange Market; Genetic Algorithm

Conflicts of Interest

The authors declare no conflicts of interest.

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