Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/65780
Authors: 
Arghyrou, Michael G.
Gregoriou, Andros
Pourpourides, Panayiotis M.
Year of Publication: 
2009
Series/Report no.: 
Cardiff Economics Working Papers E2009/2
Abstract: 
We argue that even in perfectly frictionless markets risk aversion driven by exchange rate uncertainty may cause a wedge between the domestic and foreign price of a totally homogeneous good. We test our hypothesis using a natural experiment based on 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 substantial 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.
Subjects: 
law of one price
purchasing power parity
risk aversion
exchange rate uncertainty
JEL: 
F31
F41
Document Type: 
Working Paper

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