Law of One Price in International Commodity Markets: A Fractional Cointegration Analysis

Samarendu Mohanty, Darnell B. Smith, E. Wesley F. Peterson, William H. Meyers
February 1996  [96-WP 155]

The Law of One Price (LOP) is an important component of most, if not all, international trade models because this assumption allows researchers to use a single representative price for all regions. This paper examines the long-run LOP for international commodity prices using a generalized notion of cointegration called fractional cointegration. This analysis is applied to nine pairs of price series, supporting the existence of LOP in eight cases.

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