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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.

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File URL: http://mpra.ub.uni-muenchen.de/628/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 628.

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Date of creation: 17 Jan 2006
Date of revision: 17 Jan 2006
Handle: RePEc:pra:mprapa:628

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Keywords: Law of one price; purchasing power parity; transaction costs;

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  1. Obstfeld, Maurice & Taylor, Alan M, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1672, C.E.P.R. Discussion Papers.
  2. 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.
  3. Yoram Barzel, 2005. "Replacing the Law of One Price with the Price Convergence Law," Working Papers, University of Washington, Department of Economics UWEC-2005-10, University of Washington, Department of Economics, revised Mar 2005.
  4. Geoorge Alessandria & Joseph Kaboski, 2004. "Violating purchasing power parity," Working Papers 04-19, Federal Reserve Bank of Philadelphia.
  5. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, Econometric Society, vol. 41(1), pages 135-55, January.
  6. 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, American Finance Association, vol. 50(4), pages 1309-19, September.
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