Risk aversion, exchange-rate uncertainty, and the law of one price: insights from the market for online air-travel tickets
We 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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Volume (Year): 44 (2011)
Issue (Month): 3 (August)
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