Empirically testing the law of one price in international commodity markets: A rational expectations approach.

摘要

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 addressing the LOP question is that such analyses have typically assumed that parity should hold contemporaneously. This approach overlooks the fact that international commodity trade and arbitrage takes place over time as well as across spatially separated markets. When the intertemporal elements of international commodity exchange are recognized, the issue of price and exchange rate expectations becomes of central importance to the issue of adherence to the LOP.; A simple model of intertemporal spatial trade which incorporates the price and exchange rate expectations of commodity arbitragers is constructed. An econometric procedure for empirically applying the expectations augmented model is also evaluated. The model is applied to international markets for U.S. agricultural commodities and to the international metals market. The empirical results provide support for a rational expectations view of the LOP. However, this support is limited in that the formal test of the LOP is rejected in twelve of twenty-two cases.; Extensions to the basic model of the LOP are considered in several important areas. In particular, the analysis is broadened to consider futures market trading, variables transportation costs, and a variable rate of discounting. The LOP receives limited support in international futures markets. However, when the basic model is extended to incorporate variable transportation and interest costs, the expectations augmented version of the LOP receives very strong empirical support.