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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/Revue canadienne d'économique, 2011, vol. 44, issue 3, 880-906

Abstract: 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. aperçus à partir d’un coup d’œil au marché des billets d’avion en ligne. On suggère que l’aversion au risque engendrée par l’incertitude des taux de change introduit un clivage entre les prix domestiques et étrangers d’un bien homogène. On met au test cette hypothèse à l’aide d’une base unique de micro‐données pour un marché où il y a un minimum d’imperfections. Les résultats empiriques confirment l’hypothèse: la prise en compte de l’incertitude du taux de change permet d’expliquer une proportion significative des déviations de la loi du prix unique. D’une manière générale, l’analyse suggère la possibilité d’une solution inédite aux énigmes de parité du pouvoir d’achat.

Date: 2011
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https://doi.org/10.1111/j.1540-5982.2011.01659.x

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