Risk aversion, exchange-rate uncertainty, and the law of one price: insights from the market for online air-travel tickets
AbstractWe argue that risk aversion driven by exchange-rate uncertainty causes a wedge between the domestic and foreign prices of a homogeneous good. We test our hypothesis using a unique micro-data set from a market with minimum imperfections. The empirical findings validate our hypothesis, as accounting for exchange-rate uncertainty we are able to explain a significant proportion of deviations from the law of one price. Overall, our analysis suggests the possibility of a new solution to the purchasing power parity puzzles.
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Bibliographic InfoArticle provided by Canadian Economics Association in its journal Canadian Journal of Economics.
Volume (Year): 44 (2011)
Issue (Month): 3 (August)
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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
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- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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