A new solution to the purchasing power parity puzzles? Riskaversion, exchange rate uncertainty and the law of one price: insights from the market of online air-travel tickets

Arghyrou, Michael, Gregoriou, Andros and Pourpourides, Panayiotis 2009. A new solution to the purchasing power parity puzzles? Riskaversion, exchange rate uncertainty and the law of one price: insights from the market of online air-travel tickets. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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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.

Item Type:	Monograph (Working Paper)
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory
Publisher:	Cardiff University
Date of First Compliant Deposit:	30 March 2016
Last Modified:	23 Dec 2017 21:16
URI:	http://orca.cf.ac.uk/id/eprint/77815

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