The law of one price cannot be rejected: Two tests based on the tradable/nontradable price ratio |
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| Affiliation: | 1. School of Management, University of Chinese Academy of Sciences, Beijing 100190, China;2. Wang Yanan Institute for Studies in Economics (WISE), Xiamen University, Xiamen 361005 Fujian, China;1. College of Economics and Management, Henan Agricultural University, 95 Wenhua Road, Zhengzhou 450002, China;2. Department of Economics and Finance, University of Waikato, Private bag 3105, Hamilton 3240, New Zealand;3. Department of Economics and Finance, Massey University, Private bag 11 222, Palmerston North 4442, New Zealand;4. School of Finance and Tax, Henan University of Economics and Law, North of Wenyuan Road, Longzi Lake College Park, Zheng Dong New District, Zhengzhou 450046, China |
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| Abstract: | In contrast to conventional, disaggregative testing of the law of one price, this study adopts an aggregative approach. Using a tradable/nontradable level of aggregation, a model is developed to test equality of the prices of tradables and nontradables domestically and equality of the price of tradables internationally. The disaggregative approach exhibits biases that lead to rejection of the law of one price. In contrast, the results of the aggregative technique for the law of one price are strongly positive and the limitations of the approach are found not to overcome its findings. |
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