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Fractional Cointegration and the False Rejection of the Law of One Price in International Commodity Markets

Published online by Cambridge University Press:  28 April 2015

Samarendu Mohanty ,
E. Wesley F. Peterson  and
Darnell B. Smith
Samarendu Mohanty
Affiliation:
Food and Agricultural Policy Research Institute, Iowa State University
E. Wesley F. Peterson
Affiliation:
Department of Agricultural Economics, University of Nebraska-Lincoln
Darnell B. Smith
Affiliation:
Food and Agricultural Policy Research Institute, Iowa State University
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Abstract

This study examines the Law of One Price (LOP) in international commodity markets using fractional cointegration analysis. For proper evaluation of the LOP, fractional cointegration analysis seems to be appropriate because of its flexibility in capturing a wider range of mean reversion behavior than standard cointegration analysis. Out of nine pairs of price series examined, fractional cointegration supports the existence of the LOP in eight cases, as compared to three cases using standard cointegration procedures. Overall, these results suggest that there is a long-run tendency for the LOP to hold for commodity prices.

Keywords

fractional cointegrationinternational commodity marketsLaw of One Price
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 30 , Issue 2 , December 1998 , pp. 267 - 276
Copyright
Copyright © Southern Agricultural Economics Association 1998

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