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Risk aversion, exchange-rate uncertainty, and the law of one price: Insights from the market for online air-travel tickets

Arghyrou, Michael G.; Gregoriou, Andros; Pourpourides, Panayiotis M.

Authors

Michael G. Arghyrou

Andros Gregoriou

Panayiotis M. Pourpourides



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.© Canadian Economics Association.

Citation

Arghyrou, M. G., Gregoriou, A., & Pourpourides, P. M. (2011). Risk aversion, exchange-rate uncertainty, and the law of one price: Insights from the market for online air-travel tickets. Canadian Journal of Economics / Revue Canadienne d'Économique, 44(3), 880-906. doi:10.1111/j.1540-5982.2011.01659.x

Journal Article Type Article
Online Publication Date Aug 23, 2011
Publication Date Aug 1, 2011
Deposit Date Nov 13, 2014
Journal Canadian Journal Of Economics-Revue Canadienne D Economique
Print ISSN 0008-4085
Electronic ISSN 1540-5982
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 44
Issue 3
Pages 880-906
DOI https://doi.org/10.1111/j.1540-5982.2011.01659.x
Keywords Economics and Econometrics
Public URL https://hull-repository.worktribe.com/output/465663
Publisher URL https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-5982.2011.01659.x