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 ?
(7) Capital not being able to move freely limits arbitrage opportunities and undermines the law of one price.
The Law of One Price in goods has been generalized, extended and developed into the wider concept of Purchasing Power Parity (PPP).
An alternative way to test capital market integration is based on idea of the law of one price. Under the assumption that the expected EREIT return is determined by one of the four asset pricing models, the risk price(s) associated with the EREIT return should be equal to that(those) of other portfolio returns.
The law of one price holds that two investment strategies that have exactly the same payoffs in the future should have the same value today.
Cointegration analysis allows us to test whether the price in one geographic market persistently differs from the price in the other market, taking arbitrage costs (transmission charges) into account, as a confirmation towards the law of one price. Testing for persistent price differences offers a more realistic approach to examining the law of one price than testing for whether the price in one market always equals the price in another (Woo, Lloyd-Zanetti and Horowitz, 1997).
* Contrary to intuition and expectation, net adjusted comparable prices often fail to reasonably reflect the "law of one price" principle underlying the sales-comparison approach.
The so-called "Law of One Price" is a special extreme version of this notion, where the price levels between different market chains are equal, except when a markup reflecting value is added (absolute version), or the rate of change in prices is equal (relative version).
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.
Keywords: Inflation, Price convergence, Law of one price, Relative price variability
The concept stems from the notion of the law of one price: commodities should have the same price across the world when expressed in the same currency.
Arbitrage is closely associated with another key P3 concept: purchasing-power parity or the law of one price. Arbitrage opportunities exist only where the law of one price isn't operating.
Labour theory of value, market price, perfect competition market, law of one price