Risk aversion,exchange‐rate uncertainty,and the law of one price: insights from the market for online air‐travel tickets |
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Authors: | Michael G Arghyrou Andros Gregoriou Panayiotis M Pourpourides |
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Institution: | 1. Cardiff Business School, Cardiff University;2. Bournemouth Business School, Bournemouth University |
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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. |
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Keywords: | F31 F41 |
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