Investigating the Yen/dmark Rate: Arbitrage Opportunities and a Case for Asymmetry

Derivations from the triangular equality are observed on foreign exchange markets when the respective rates are sampled with very high frequencies. At a rst glance a standard error correction model seems appropriate to explain the evolution of FX{returns depending on recent returns and on deviations from the triangular equality. The paper examines the validity of the common error correction model when analyzing the short run dynamics of the yen/dmark rate. Asymmetric eeects are detected. Estimation and forecasting results are given for error correction models assuming symmetric and asymmetric dynamics alternatively.