The Effect of Triangular Arbitrageon the Financial Performance of Forex Market in Kenya

Abstract

The objective of this study was to investigate the existence of triangular arbitrage in the forex market in Kenya and the effect thereof on the financial performance of the forex market in Kenya. From the literature review many authors have argued that short term triangular arbitrage opportunities exist in the forex market among the most traded currencies inviting traders to exploit them quickly hence eliminating mispricing in the forex market. Previous studies have been done concerning arbitrage opportunities in the forex market, but they have not dealt with the impact of the arbitrage opportunities on the performance of the forex market, this research has filled the gap by determining the effect of the triangular arbitrage on the forex market performance. Descriptive cross-sectional design was adopted in this study. Secondary data was obtained from central bank of Kenya. Findings of the study confirmed the existence of triangular arbitrage in the forex market. Kenya shilling was observed to have depreciated against the USD over the period in consideration. The level of volatility in the first half of the period of study was found to be lower than the volatility in the second half of the period of study. In general, the study revealed that the performance of the forex market in Kenya can be predicted using arbitrage pricing theory multifactor model if triangular arbitrage is known. The study confirmed the existence of weak form market efficiency hence the existence of arbitrage opportunities.