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>A new solution to the purchasing power parity puzzles? Riskaversion, exchange rate uncertainty and the law of one price: insights from the market of online air-travel tickets
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A new solution to the purchasing power parity puzzles? Riskaversion, exchange rate uncertainty and the law of one price: insights from the market of online air-travel tickets
We argue that even in perfectly frictionless markets risk aversion driven by exchange rate uncertainty may cause a wedge between the domestic and foreign price of a totally homogeneous good. We test our hypothesis using a natural experiment based on 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 substantial 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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