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http://hdl.handle.net/10419/65780
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| Title: | | A new solution to the purchasing power parity puzzles: Risk-aversion, exchange rate uncertainty and the law of one price  |
| Authors: | | Arghyrou, Michael G. Gregoriou, Andros Pourpourides, Panayiotis M. |
| Issue Date: | | 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 |
| Appears in Collections: | | Cardiff Economics Working Papers
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