Purchasing power parity and triangular arbitrage
Purchasing power parity and triangular arbitrage
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Pavel Filip · External communityPost link
External question — Economics Stack Exchange
Author: Pavel Filip
Original post: https://economics.stackexchange.com/questions/57997
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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Does no arbitrage in the FX market have any implications for purchasing power parity (PPP) tests? To be more specific, suppose you have currencies A, B and C and you can form three currency pairs (exchange rates) AB, BC and AC. Only two of those can be independent of each other. Suppose you run a test on each currency pair to see whether or not PPP holds and only two of the tests indicate a PPP relationship. Is this result consistent with a no-arbitrage FX market? I would lean towards a yes, but I am not entirely sure.
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Quoted from Forex.com.bd-Editorial External question — Economics Stack Exchange Author: Pavel Filip Source score (net votes, not local likes): 0 Original post: https://economics.stackexchange.com/questions/57997 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Does no arbitrage in the FX market have any implications for purchasing power parity (PPP) tests? To be more specific, suppose you have currencies A, B and C and you can form three currency pairs (exchange rates) AB, BC and AC. Only two of those can be independent of each other. Suppose you run a test on each currency pair to see whether or not PPP holds and only two of the tests indicate a PPP relationship. Is this result consistent with a no-arbitrage FX market? I would lean towards a yes, but I am not entirely sure.
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