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Fractional Cointegration and the False Rejection of the Law of One Price in International Commodity Markets

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  • Mohanty, Samarendu
  • Peterson, E. Wesley F.
  • Smith, Darnell B.

Abstract

This study examines the Law of One Price (LOP) in international commodity markets using fractional cointegration analysis. For proper evaluation of the LOP, fractional cointegration analysis seems to be appropriate because of its flexibility in capturing a wider range of mean reversion behavior than standard cointegration analysis. Out of nine pairs of price series examined, fractional cointegration supports the existence of the LOP in eight cases, as compared to three cases using standard cointegration procedures. Overall, these results suggest that there is a long-run tendency for the LOP to hold for commodity prices.

Suggested Citation

  • 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.
    • Handle: RePEc:cup:jagaec:v:30:y:1998:i:02:p:267-276_00
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    Cited by:

    1. Lee, Dae-Seob & Kennedy, P. Lynn, 2005. "Demand behavior of U.S. high fructose corn syrup (HFCS) and its implication for the U.S. sweetener market: a cointegration analysis," 2005 Annual meeting, July 24-27, Providence, RI 19564, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. 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).
    3. Daniel Agyapong & Anokye M. Adam, 2012. "Exchange Rate Behaviour: Implication for West African Monetary Zone," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(4), pages 215-228, October.
    4. Thomas H. Spreen & Richard L. Kilmer & Carlos R. Pitta, 2007. "Nonhomogeneous products and the law of one price," Agribusiness, John Wiley & Sons, Ltd., vol. 23(3), pages 407-420.
    5. Yang, Jian & Bessler, David A. & Leatham, David J., 2000. "The Law of One Price: Developed and Developing Country Market Integration," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 32(3), pages 429-440, December.
    6. Vides, José Carlos & Golpe, Antonio A. & Iglesias, Jesús, 2020. "The EHTS and the persistence in the spread reconsidered. A fractional cointegration approach," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 124-137.

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