A new solution to the purchasing power parity puzzles? Risk-aversion, exchange rate uncertainty and the law of one price: Insights from the market of online air-travel tickets
AbstractWe argue that even in perfectly frictionless markets risk aversion driven by exchange rate uncertainty may cause a wedge between the domestic and foreign price of a totally homogeneous good. We test our hypothesis using a natural experiment based on 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 substantial 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/2.
Length: 27 pages
Date of creation: Jan 2009
Date of revision: Jul 2009
Publication status: Forthcoming in Canadian Journal of Economics
Contact details of provider:
Postal: Aberconway Building, Colum Drive, CARDIFF, CF10 3EU
Phone: +44 (0) 29 20874417
Fax: +44 (0) 29 20874419
Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers
More information through EDIRC
Law of one price; purchasing power parity; risk aversion; exchange rate uncertainty;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-07 (All new papers)
- NEP-CBA-2009-02-07 (Central Banking)
- NEP-IFN-2009-02-07 (International Finance)
- NEP-OPM-2009-02-07 (Open Economy Macroeconomic)
- NEP-UPT-2009-02-07 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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 1309-19, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruce Webb).
If references are entirely missing, you can add them using this form.