Triangular arbitrage in foreign exchange rate forecasting markets

The non-existence of triangular arbitrage in an efficient foreign exchange markets is widely believed. In this paper, we deploy a forecasting model to predict foreign exchange rates and apply the triangular arbitrage model to evaluate the possibility of an arbitrage opportunity. Surprisingly, we substantiate the existence of triangular arbitrage opportunities in the exchange rate forecasting market even with transaction costs. This also implies the inefficiency of the market and potential market threats of profit-seeking investors. In our experiments, neural network based model with back-propagation (BP-NN) is used for exchange rate forecasting.