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Empirically Testing the Law of One Price in an International Commodity Market: A Rational Expectations Application to the Natural Rubber Market

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  • Barry K. Goodwin

Abstract

The Law of One Price (LOP) is an important ingredient in theories of international trade and exchange rate determination. An important shortcoming of the existing empirical literature is that parity is typically assumed to hold contemporaneously. This overlooks the fact that international commodity arbitrage takes place over time as well as across spatially separated markets. Recognizing this fact, we expect to see parity holding for expected prices. A model which incorporates the expectations of commodity arbitragers is constructed and used to test the LOP in the natural rubber market. Results indicate that the inclusion of expectations may be of value when considering the LOP.

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  • Barry K. Goodwin, 1990. "Empirically Testing the Law of One Price in an International Commodity Market: A Rational Expectations Application to the Natural Rubber Market," Agricultural Economics, International Association of Agricultural Economists, vol. 4(2), pages 165-177, June.
    • Handle: RePEc:bla:agecon:v:4:y:1990:i:2:p:165-177
    DOI: 10.1111/j.1574-0862.1990.tb00115.x
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    Cited by:

    1. Miranda Svanidze & Linde Götz & Dmytro Serebrennikov, 2022. "The influence of Russia's 2010/2011 wheat export ban on spatial market integration and transaction costs of grain markets," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 44(2), pages 1083-1099, June.
    2. Rezitis, Anthony N. & Brown, A. Blake, 1999. "Pass-through of exchange rates and tariffs in Greek-US tobacco trade," Agricultural Economics, Blackwell, vol. 21(3), pages 269-277, December.
    3. Mohanty, Samarendu & Peterson, E. Wesley F. & Smith, Darnell B., 1998. "Price Integration In Mercosur Countries: A Fractional Cointegration Analysis," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20954, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Svanidze, Miranda & Götz, Linde & Serebrennikov, Dmytro, 2022. "The influence of Russia's 2010/2011 wheat export ban on spatial market integration and transaction costs of grain markets," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 44(2), pages 1083-1099.
    5. Santeramo, Fabio, 2021. "Price dynamics, LOP and quantile regressions," MPRA Paper 107454, University Library of Munich, Germany.
    6. Stefano Mainardi, 2018. "Fishing vessel efficiency, skipper skills and hake price transmission in a small island economy," Review of Agricultural, Food and Environmental Studies, Springer, vol. 99(3), pages 215-251, December.
    7. Mohanty, Samarendu & Peterson, E. Wesley F. & Smith, Darnell B., 1998. "Fractional Cointegration and the False Rejection of the Law of One Price in International Commodity Markets," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 30(2), pages 267-276, December.
    8. Phillips, Llad & Pippenger, John, 2005. "Some Pitfalls in Testing the Law of One Price in Commodity Markets," University of California at Santa Barbara, Economics Working Paper Series qt92b16177, Department of Economics, UC Santa Barbara.

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