The Law of One Price in Financial Markets

摘要

It is good for a scientific enterprise, as well as for a society, to have well-established laws. Physics has excellent laws, such as the law of gravity. What does economics have? The first law of economics is clearly the law of supply and demand, and a fine law it is. We would nominate as the second law "the law of one price," hereafter simply the Law. The Law states that identical goods must have identical prices. For example, an ounce of gold should have the same price (expressed in U.S. dollars) in London as it does in Zurich, otherwise gold would flow from one city to the other. Economic theory teaches us to expect the Law to hold exactly in competitive markets with no transactions costs and no barriers to trade, but in practice, details about market institutions are important in determining whether violations of the Law can occur.