BROWSE

Law Of One Price

Definition

The law of one price constitutes the basis of the theory of purchasing power parity, an assumption that in some circumstances it would cost exactly the same number of, for example, US dollars to buy euros and then to use the proceeds to buy a market basket of goods as it would cost to use those dollars directly in purchasing the market basket of goods.

What is the 'Law Of One Price'

The law of one price is the economic theory that the price of a given security, commodity or asset has the same price when exchange rates are taken into consideration. The law of one price is another way of stating the concept of purchasing power parity. The law of one price exists due to arbitrage opportunities.

Explaining 'Law Of One Price'

If the price of a security, commodity or asset is different in two different markets, then an arbitrageur purchases the asset in the cheaper market and sells it where prices are higher. When the purchasing power parity doesn't hold, arbitrage profits will persist until the price converges across markets.

Law of One Price and Commodities

When dealing in commodities, the cost to transport the goods must be included, resulting in different prices when commodities from two different locations are examined. If the difference is goes beyond the transportation costs, this can be a sign of a shortage or excess within a particular region.

Purchasing Power Parity

Purchasing power parity describes the effects controlled by the theory of the law of one price. It relates to a formula that can be applied to compare securities across markets that trade in different currencies. As exchange rates can shift frequently, the formula must be recalculated on a regular basis to ensure equality across the different international markets.

The Law of One Expected Return

A continuation of the law of one price is the law of one expected return. This governs the idea that securities with similar asset prices and similar risks would be expected to generate similar returns.


Further Reading


Margin-based asset pricing and deviations from the law of one price
academic.oup.com [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

Why does the law of one price fail? An experiment on index mutual fundsWhy does the law of one price fail? An experiment on index mutual funds
academic.oup.com [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

The law of one price: evidence from the transitional economy of ChinaThe law of one price: evidence from the transitional economy of China
www.mitpressjournals.org [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

Potential pitfalls for the purchasing‐power‐parity puzzle? Sampling and specification biases in mean‐reversion tests of the law of one pricePotential pitfalls for the purchasing‐power‐parity puzzle? Sampling and specification biases in mean‐reversion tests of the law of one price
onlinelibrary.wiley.com [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

Testing for market integration and the law of one price in world shrimp marketsTesting for market integration and the law of one price in world shrimp markets
www.tandfonline.com [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

Time-varying threshold cointegration and the law of one priceTime-varying threshold cointegration and the law of one price
www.tandfonline.com [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

Convergence to the law of one price without trade barriers or currency fluctuationsConvergence to the law of one price without trade barriers or currency fluctuations
academic.oup.com [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

The law of one price—a case studyThe law of one price—a case study
onlinelibrary.wiley.com [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

The law of one price: developed and developing country market integrationThe law of one price: developed and developing country market integration
ageconsearch.umn.edu [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …

A revised test of the law of one price using rational price expectationsA revised test of the law of one price using rational price expectations
academic.oup.com [PDF]
… Close mobile search navigation Article Navigation. Issue Cover. Volume 24. Issue 6. June 2011. Article Contents. Abstract. 1. Model. 2. Margin-based Asset Prices … Margin-based Asset Pricing and Deviations from the Law of One Price …



Q&A About Law Of One Price


What does purchasing power parity describe?

Purchasing power parity describes the effects controlled by the theory of the law of one price.

What is the law of one price?

The law of one price is the economic theory that the price of a given security, commodity or asset has the same price when exchange rates are taken into consideration.

How do you calculate purchasing power parity?

You must take into account all costs involved in transporting goods from different locations and then compare prices to ensure they are equal.

Who determines a price?

A monopolist determines a price or market conditions may determine it for them.

When dealing with commodities, what must be included in order to determine if there is an arbitrage opportunity?

Transportation costs must be considered. If there is a difference between two markets, this could indicate a shortage or excess within a particular region.

How does a price affect production costs, supply and demand?

The cost of production affects the price. If the cost of production increases, then the producer will likely increase prices. Supply and demand also affect prices. If there is an excess supply, then prices will decrease; if there is an excess demand, then prices will increase.