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Strictly Speaking, the Law of One Price Works in Commodity Markets

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Author Info
John Pippenger (University of California, Santa Barbara)
Abstract

Pippenger and Phillips (forthcoming) show how four common pitfalls cause cointegration tests to reject the law of one price when in fact it holds. They conclude that there is no reliable evidence that rejects the LOP. We consider a stronger test, half lives. The literature suggests that half lives for differentials in spot prices last several quarters. We show that, when we avoid the four common pitfalls, half lives for differentials for spot grain prices range from 3 to 8 weeks. Such short half lives have potentially important implications for the Borders literature and real exchange rates.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number 17-07.

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Date of creation: 01 Sep 2007
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Handle: RePEc:cdl:ucsbec:17-07

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Related research
Keywords: law of one price; exchange rates; half lives;

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  1. Lo, Ming Chien & Zivot, Eric, 2001. "Threshold Cointegration And Nonlinear Adjustment To The Law Of One Price," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 533-576, September. [Downloadable!]
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  2. Maurice Obstfeld & Alan M. Taylor, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," NBER Working Papers 6053, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Murray, Christian J. & Papell, David H., 2002. "The purchasing power parity persistence paradigm," Journal of International Economics, Elsevier, vol. 56(1), pages 1-19, January. [Downloadable!] (restricted)
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  4. Matthias Lutz, 2004. "Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market," Review of International Economics, Blackwell Publishing, vol. 12(3), pages 456-475, 08. [Downloadable!] (restricted)
  5. Andrews, Donald W K, 1993. "Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models," Econometrica, Econometric Society, vol. 61(1), pages 139-65, January. [Downloadable!] (restricted)
  6. Parsley, David C. & Wei, Shang-Jin, 2001. "Explaining the border effect: the role of exchange rate variability, shipping costs, and geography," Journal of International Economics, Elsevier, vol. 55(1), pages 87-105, October. [Downloadable!] (restricted)
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  7. Michael, Panos & Nobay, A Robert & Peel, David, 1994. "Purchasing power parity yet again: evidence from spatially separated commodity markets," Journal of International Money and Finance, Elsevier, vol. 13(6), pages 637-657, December. [Downloadable!] (restricted)
  8. Richardson, J. David, 1978. "Some empirical evidence on commodity arbitrage and the law of one price," Journal of International Economics, Elsevier, vol. 8(2), pages 341-351, May. [Downloadable!] (restricted)
  9. Jonathan Haskel & Holger Wolf, 2001. "The Law of One Price - A Case Study," NBER Working Papers 8112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Engel, Charles & Rogers, John H, 2001. "Violating the Law of One Price: Should We Make a Federal Case Out of It?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 1-15, February.
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  12. Alchian, Armen A, 1977. "Why Money?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 133-40, February. [Downloadable!] (restricted)
  13. Marcus Asplund & Richard Friberg, 2001. "The Law of One Price in Scandinavian Duty-Free Stores," American Economic Review, American Economic Association, vol. 91(4), pages 1072-1083, September. [Downloadable!] (restricted)
  14. Sarno, Lucio & Taylor, Mark P. & Chowdhury, Ibrahim, 2004. "Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 1-25, February. [Downloadable!] (restricted)
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This page was last updated on 2009-11-16.

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