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Trade Costs and Deviations from the Law of One Price
Author(s) -
Chami Batista J.,
Silveira Filho G. B.
Publication year - 2010
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1093/ajae/aaq044
Subject(s) - law of one price , arbitrage , economics , foundation (evidence) , relevance (law) , relative price , empirical evidence , financial economics , econometrics , microeconomics , law , mid price , monetary economics , price level , philosophy , epistemology , political science
The link between relative prices across countries and trade costs requires a theoretical foundation that is absent in the literature to date. Empirical tests on the law of one price are based on an arbitrage equation, which is of very limited relevance in understanding this link. The application of a new set of arbitrage equations to the tin trade market yields results that are consistent with our theoretical expectations. We find evidence in favor of the law of one price between the United States and Japan. However, evidence of price discrimination is also found for the Los Angeles market.