Citation

Discussion Paper Details

Please find the details for DP3377 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Non-Linear Dynamics in Deviations from the Law of One Price: A Broad-Based Empirical Study

Author(s): Ibrahim Chowdhury, Lucio Sarno and Mark P Taylor

Publication Date: May 2002

Keyword(s): law of one price, mean reversion, purchasing power parity, real exchange rate and threshold non-linearity

Programme Area(s): International Macroeconomics

Abstract: In this Paper we test empirically the validity of the law of one price using data for five major bilateral US dollar exchange rates and nine goods sectors during the recent floating exchange rate regime since the early 1970s. Using threshold autoregressive models, we find strong evidence of non-linear mean reversion in deviations from the law of one price with plausible convergence speeds. Consistent with theoretical arguments on international goods markets arbitrage under transactions costs and with an emerging strand of empirical literature, these results contribute towards forming a consensus view in favour of discrete regime switching in deviations from the law of one price and the presence of differing non-zero transactions costs across a broad range of goods and countries.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3377

Bibliographic Reference

Chowdhury, I, Sarno, L and Taylor, M. 2002. 'Non-Linear Dynamics in Deviations from the Law of One Price: A Broad-Based Empirical Study'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3377