Does the law of one price hold in international financial markets? Evidence from tick data

Q. Farooq Akram, Dagfinn Rime () and Lucio Sarno ()

No 2008/19, Working Paper from Norges Bank

Abstract: This paper investigates the validity of the law of one price (LOP) in international financial markets by examining the frequency, size and duration of inter-market price di erentials for borrowing and lending services (`one-way arbitrage'). Using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, we nd that the LOP holds on average, but numerous economically signi cant violations of the LOP arise. The duration of these violations is high enough to make it worth- while searching for one-way arbitrage opportunities in order to minimize borrowing costs and/or maximize earnings on given funds. We also document that such opportunities decline with the pace of the market and increase with market volatility.

Keywords: Law of one price; One-way arbitrage; Foreign exchange microstructure (search for similar items in EconPapers)
JEL-codes: F31 F41 G14 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-ifn and nep-mst
Date: 2008-11-03

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Related works:
Journal Article: Does the law of one price hold in international financial markets? Evidence from tick data (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:bno:worpap:2008_19

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