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Risk aversion, exchange‐rate uncertainty, and the law of one price: insights from the market for online air‐travel tickets

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  • Michael G. Arghyrou
  • Andros Gregoriou
  • Panayiotis M. Pourpourides

Abstract

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. aperçus à partir d’un coup d’œil au marché des billets d’avion en ligne. On suggère que l’aversion au risque engendrée par l’incertitude des taux de change introduit un clivage entre les prix domestiques et étrangers d’un bien homogène. On met au test cette hypothèse à l’aide d’une base unique de micro‐données pour un marché où il y a un minimum d’imperfections. Les résultats empiriques confirment l’hypothèse: la prise en compte de l’incertitude du taux de change permet d’expliquer une proportion significative des déviations de la loi du prix unique. D’une manière générale, l’analyse suggère la possibilité d’une solution inédite aux énigmes de parité du pouvoir d’achat.

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  • Michael G. Arghyrou & Andros Gregoriou & Panayiotis M. Pourpourides, 2011. "Risk aversion, exchange‐rate uncertainty, and the law of one price: insights from the market for online air‐travel tickets," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 44(3), pages 880-906, August.
    • Handle: RePEc:wly:canjec:v:44:y:2011:i:3:p:880-906
    DOI: 10.1111/j.1540-5982.2011.01659.x
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    1. Arghyrou, Michael G. & Kontonikas, Alexandros, 2012. "The EMU sovereign-debt crisis: Fundamentals, expectations and contagion," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 658-677.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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