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]
Mohanty, S., D.B. Smith, E. Peterson, and W.H. Meyers. 1996. "Law of One Price in International Commodity Markets: A Fractional Cointegration Analysis." Working paper 96-WP 155. Center for Agricultural and Rural Development, Iowa State University.
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.