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Can the Law of One Price be tested?

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Keywords
  • F14 - Empirical Studies Of Trade
  • F0 - General

Abstract

A simple stylised model, that incorporates transaction costs, is developed. The Law of One Price (LOP) is assumed to hold with regard to a reference market that is not taken into account in the empirical testing of the Law. It is shown that under these assumptions the empirical tests of the LOP will fail.

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