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.

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. https://doi.org/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
• 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
• Contract Date: Nov 13, 2014