Law of one price


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Law of one price

An economic rule stating that a given security must have the same price no matter how the security is created. If the payoff of a security can be synthetically created by a package of other securities, the implication is that the price of the package and the price of the security whose payoff it replicates must be equal. If it is unequal, an arbitrage opportunity would present itself.

Absolute Form of Purchasing Power Parity

A theory stating that the same good or service costs the same amount regardless of the currency in which it is measured. For instance, if 1 pound is equivalent to 2 dollars, and a widget costs 1 pound in England, then the absolute form of purchasing power parity would state that the same widget would cost 2 dollars in the United States. This concept is also called the law of one price. In securities, any deviations from the absolute form of purchasing power parity create opportunities for arbitrage (profiting from inefficiencies in prices). See also: Purchasing power parity, Currency pair.
References in periodicals archive ?
1) The relative version of the law of one price posits that rates of change in prices will be equalized, meaning that exchange rate-adjusted inflation rates should be the same for similar traded goods.
Section 4 uses a general co-integration approach to test (1) the existence of a long-run relationship between the domestic prices, the exchange rate, the international prices, and, when applicable, the domestic "support" prices; and (2) whether the law of one price applies, at least in a "weak" sense, allowing for a possible constant wedge between domestic and international prices.
Letting [Mathematical Expression Omitted] and [Mathematical Expression Omitted] represent the prices of sesame seeds in Britain (in pounds) and the United States (in dollars), respectively, then the law of one price can be expressed as follows:
When aggregated over all goods, the law of one price yields the purchasing power parity, which is stated as
My 1993 paper(4) asks whether the general pattern assumed by the neoclassical models - that failures of the law of one price across countries are relatively small, and that there are significant relative price changes within countries - is true in the data.
Wei, "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Paper No.
Also of importance are the permissible deviations from the law of one price.
Sampling And Specification Biases In Mean-Reversion Tests Of The Law Of One Price.
Adjusted comparable prices and the law of one price
Among the topics are empirical evidence on the theory of non-renewable resource economics, bioeconomics: nature as capital, biological resistance, the spatial economics of forest conservation, water institutions and the law of one price, and transboundary water issues.
Seigniorage benefits are significant-for example, the US has enjoyed a higher rate of return on its assets held abroad than it has had to pay foreigners on their dollar assets for every single quarter since 1960-defying the law of one price.
Building on existing literature on cross-listing and using the data of listed Chinese companies from 1993 to 2010, Liu examines the relevance of the theories of bonding hypothesis, co-integration, and the law of one price in the context of Chinese firms' cross-listing in the six major international capital markets.