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Can the Law of One Price be tested?

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  • Philip, Kostov

Abstract

A simple stylised model, that incorporates transaction costs, is developed. The Law of One Price (LOP) is assumed to hold with regard to a reference market that is not taken into account in the empirical testing of the Law. It is shown that under these assumptions the empirical tests of the LOP will fail.

Suggested Citation

  • Philip, Kostov, 2006. "Can the Law of One Price be tested?," MPRA Paper 628, University Library of Munich, Germany, revised 17 Jan 2006.
    • Handle: RePEc:pra:mprapa:628
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    File URL: https://mpra.ub.uni-muenchen.de/628/1/MPRA_paper_628.pdf
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    References listed on IDEAS

    as
    1. George Alessandria & Joseph P. Kaboski, 2004. "Violating purchasing power parity," Working Papers 04-19, Federal Reserve Bank of Philadelphia.
    2. Yoram Barzel, 2005. "Replacing the Law of One Price with the Price Convergence Law," Working Papers UWEC-2005-10, University of Washington, Department of Economics, revised Mar 2005.
    3. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 441-479, December.
    4. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. "The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-1319, September.
    5. Owen A. Lamont & Richard H. Thaler, 2003. "Anomalies: The Law of One Price in Financial Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 191-202, Fall.
    6. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-155, January.
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    Cited by:

    1. Arintoko, 2011. "Exchange rate pass-through, import prices and inflation under structural breaks," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 3(1), pages 55-75, April.

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    More about this item

    Keywords

    Law of one price; purchasing power parity; transaction costs;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F0 - International Economics - - General

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