Risk aversion, exchange-rate uncertainty, and the law of one price: insights from the market for online air-travel tickets

Michael Arghyrou, Andros Gregoriou and Panayiotis Pourpourides

Canadian Journal of Economics, 2011, vol. 44, issue 3, 880-906

Abstract: We argue that risk aversion driven by exchange-rate uncertainty causes a wedge between the domestic and foreign prices of a homogeneous good. We test our hypothesis using 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 significant 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.

JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2011
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