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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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