Triangular arbitrage across forex and cryptocurrency markets during the COVID-19 crisis: a MRS-AR approach

ABSTRACT

This article employs a Markovian regime-switching autoregressive approach to examine triangular arbitrage across forex and cryptocurrency markets during the coronavirus disease 2019 crisis. The findings suggest the following: (1) profitable triangular arbitrage tends to occur in the turbulent period during the crisis, significantly outperforming cryptocurrency investments; and (2) the persistent profitability of triangular arbitrage ensues from strong memory of high returns, low risk, and shock response to global quantitative monetary easing policy. Regulatory authorities should consolidate cryptocurrency supervision systems and establish cross-border coordination mechanisms to stabilize exchange rates and enhance market efficiency.

KEYWORDS:

• Triangular arbitrage
• forex
• cryptocurrency
• COVID-19
• Markovian regime-switching autoregressive approach

JEL CLASSIFICATION:

• C32
• F31
• G15

Acknowledgments

I would like to thank the editors and anonymous referees for their useful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was funded by the China Scholarship Council (CSC) [202008330049] supporting me as a visiting scholar at the University of Melbourne, by Zhejiang Provincial National Science Foundation of China [LY18G010006], and by Scientific Research Foundation of Zhejiang A&F University [2017FR018 & W20190056].