Empirically Testing the Law of One Price in an International Commodity Market: A Rational Expectations Application to the Natural Rubber Market

The Law of One Price (LOP) is an important ingredient in theories of international trade and exchange rate determination. An important shortcoming of the existing empirical literature is that parity is typically assumed to hold contemporaneously. This overlooks the fact that international commodity arbitrage takes place over tim~> <<8 well as across spatially separated markets. Recognizing this fact, we expect to see parity holding for expected prices. A model which incorporates the expectations of commodity arbitragers is constructed and used to test the LOP in the natural rubber market. Results indicate that the inclusion of expectations may be of value when considering the LOP.


Issue Date:
1990-06
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/172473
Published in:
Agricultural Economics: The Journal of the International Association of Agricultural Economists, Volume 04, Issue 2
Page range:
165-177
Total Pages:
14




 Record created 2017-04-01, last modified 2017-08-27

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