Temporal Aggregation and Convergence to the Law of One Price: Evidence from Micro Data

Andrés Elberg

No 53, Working Papers from Facultad de Economía y Empresa, Universidad Diego Portales

Abstract: Estimates of speed of convergence towards the Law of One Price (LOP) are potentially afflicted by three sources of bias: temporal aggregation; aggregation across goods; and short samples. I empirically assess the importance of temporal aggregation bias (while accounting for the other two sources of bias) using a novel dataset of weekly-sampled retail prices. I find that temporal aggregation can severely bias estimates of persistence in relative prices. Using quarterly aggregated data can overestimate the half-life of deviations from the LOP by a factor exceeding 2. In contrast, I do not find evidence that aggregation across goods biases persistence estimates.

Date: 2014-04
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