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

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1996-02-01
Authors
Mohanty, Samarendu
Smith, Darnell
Peterson, E. Wesley
Meyers, William
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Center for Agricultural and Rural Development
Abstract

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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