Some pitfalls in testing the law of one price in commodity markets

John Pippenger and Llad Phillips

Journal of International Money and Finance, 2008, vol. 27, issue 6, 915-925

Abstract: Several articles find no support for the LOP in commodity markets. A few articles find some support. Rejecting the LOP would strike at the heart of economic theory. Rejection would suggest that firms do not maximize wealth and households do not maximize utility. Our objective is to show how four common pitfalls can cause tests of the LOP to fail when in fact the LOP holds. All tests that fail to support the LOP fall in to at least two pitfalls. All of these pitfalls are the result of ignoring important practical implications of arbitrage.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:27:y:2008:i:6:p:915-925

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