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: | Arghyrou Michael G, Gregoriou Andros, Pourpourides Panayiotis M |
Keywords: | transportation: air, e-commerce |
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.