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Does the law of one price hold in international financial markets? Evidence from tick data

Author

Listed:
  • Q. Farooq Akram

    (Norges Bank (Central Bank of Norway))

  • Dagfinn Rime

    (Norges Bank (Central Bank of Norway))

  • Lucio Sarno

    (Cass Business School and CEPR)

Abstract

This paper investigates the validity of the law of one price (LOP) in international financial markets by examining the frequency, size and duration of inter-market price di erentials for borrowing and lending services (`one-way arbitrage'). Using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, we nd that the LOP holds on average, but numerous economically signi cant violations of the LOP arise. The duration of these violations is high enough to make it worth- while searching for one-way arbitrage opportunities in order to minimize borrowing costs and/or maximize earnings on given funds. We also document that such opportunities decline with the pace of the market and increase with market volatility.

Suggested Citation

  • Q. Farooq Akram & Dagfinn Rime & Lucio Sarno, 2008. "Does the law of one price hold in international financial markets? Evidence from tick data," Working Paper 2008/19, Norges Bank.
    • Handle: RePEc:bno:worpap:2008_19
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Law of one price; One-way arbitrage; Foreign exchange microstructure;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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