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Anomalies: The Law of One Price in Financial Markets

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  • Owen A. Lamont
  • Richard H. Thaler

Abstract

The Law of One price states that identical goods (or securities) should sell for identical prices. In financial markets the law of one price is thought to hold almost exactly, and is the basis for much of financial economic theory. We present evidence on several examples of violations of this law, including closed-end country funds, twin shares, dual class shares, and corporate spinoffs. We analyze the causes of these violations, and show they all stem from some limits on the extent to which rational arbitrageurs can intervene.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 17 (2003)
Issue (Month): 4 (Fall)
Pages: 191-202

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Handle: RePEc:aea:jecper:v:17:y:2003:i:4:p:191-202

Note: DOI: 10.1257/089533003772034952
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  1. Kenneth A. Froot & Emil Dabora, 1998. "How are Stock Prices Affected by the Location of Trade?," NBER Working Papers 6572, National Bureau of Economic Research, Inc.
  2. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
  3. Peter Klibanoff & Owen Lamont & Thierry A. Wizman, 1996. "Investor Reaction to Salient News in Closed-End Country Funds," NBER Working Papers 5588, National Bureau of Economic Research, Inc.
  4. Ross, Stephen A, 1987. "The Interrelations of Finance and Economics: Theoretical Perspectives," American Economic Review, American Economic Association, vol. 77(2), pages 29-34, May.
  5. Rosenthal, Leonard & Young, Colin, 1990. "The seemingly anomalous price behavior of Royal Dutch/Shell and Unilever N.V./PLC," Journal of Financial Economics, Elsevier, vol. 26(1), pages 123-141, July.
  6. Franklin R. Edward, 1999. "Hedge Funds and the Collapse of Long-Term Capital Management," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 189-210, Spring.
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