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

Mark Taylor, Lucio Sarno and Ibrahim Chowdhury

No 3377, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Law of one price; Purchasing power parity; Real exchange rate; Threshold non-linearity; Mean reversion (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2002-05
New Economics Papers: this item is included in nep-ets and nep-ifn
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://cepr.org/publications/DP3377 (application/pdf)

Related works:
Journal Article: Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3377

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3377

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().