Risk aversion, exchange-rate uncertainty, and the law of one price: insights from the market for online air-travel tickets

Risk aversion, exchange-rate uncertainty, and the law of one price: insights from the market for online air-travel tickets

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Article ID: iaor201111972
Volume: 44
Issue: 3
Start Page Number: 880
End Page Number: 906
Publication Date: Aug 2011
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors: , ,
Keywords: transportation: air, e-commerce
Abstract:

We argue that risk aversion driven by exchange‐rate uncertainty causes a wedge between the domestic and foreign prices of a homogeneous good. We test our hypothesis using a unique micro‐data set from a market with minimum imperfections. The empirical findings validate our hypothesis, as accounting for exchange‐rate uncertainty we are able to explain a significant proportion of deviations from the law of one price. Overall, our analysis suggests the possibility of a new solution to the purchasing power parity puzzles.

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