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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

  • Goodwin, Barry K.

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 tim~> <<8 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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Article provided by Blackwell in its journal Agricultural Economics.

Volume (Year): 4 (1990)
Issue (Month): 2 (June)
Pages: 165-177

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Handle: RePEc:eee:agecon:v:4:y:1990:i:2:p:165-177
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  1. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December.
  2. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
  3. Protopapadakis, Aris & Stoll, Hans R, 1983. " Spot and Futures Prices and the Law of One Price," Journal of Finance, American Finance Association, vol. 38(5), pages 1431-55, December.
  4. A. Protopapadakis, Aris & R. Stoll, Hans, 1986. "The Law of One Price in international commodity markets: A reformulation and some formal tests," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 335-360, September.
  5. Irving B. Kravis & Robert E. Lipsey, 1977. "Price Behavior in the Light of Balance of Payments Theories," NBER Working Papers 0181, National Bureau of Economic Research, Inc.
  6. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
  7. Crouhy-veyrac, Liliane & Crouhy, Michel & Melitz, Jacques, 1982. "More about the law of one price," European Economic Review, Elsevier, vol. 18(2), pages 325-344.
  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.
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