Non-linear dynamics in deviations from the law of one price: a broad-based empirical study
Sarno, Lucio, Taylor, Mark P., 1958- and Chowdhury, Ibrahim, 1972- (2002) Non-linear dynamics in deviations from the law of one price: a broad-based empirical study. Discussion Paper. Centre for Economic Policy Research (Great Britain), London.
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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.
|Item Type:||Working or Discussion Paper (Discussion Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Purchasing power parity, Foreign exchange rates, Nonlinear theories|
|Series Name:||Discussion paper (Centre for Economic Policy Research (Great Britain))|
|Publisher:||Centre for Economic Policy Research (Great Britain)|
|Place of Publication:||London|
|Number of Pages:||41|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Adapted As:||Sarno, L., Taylor, M.P. and Chowdhury, I. (2002). Non-linear dynamics in deviations from the law of one price: a broad-based empirical study. Journal of International Money and Finance, 23(1), pp. 1-25.|
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