<p>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.</p>

CC BY-SA 4.0
2024-03-31T13:31:59.297Z
Is that mathematically possible? If two PPP relationships hold then a good in country A costs the same as the good in country B, and similarly for B versus C, then surely the good costs the same in A and C ?
dm63
CC BY-SA 4.0
2024-03-31T18:45:25.727Z
@dm63 I didn't realize that. Thank you.
Pavel Filip
<exchange-rates>
Purchasing power parity and triangular arbitrage
Pavel Filip
# Purchasing power parity and triangular arbitrage

(Asked by: username_0 on 2024-03-31)

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.

**Tags:** exchange-rates
> **Comments:**
> **username_1**: Is that mathematically possible? If two PPP relationships hold then a good in country A costs the same as the good in country B, and similarly for B versus C, then surely the good costs the same in A and C ?  
> **username_0**: @dm63 I didn't realize that. Thank you.  

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## 0 answers

