Norges Bank

Working Paper

Does the law of one price hold in international financial markets? Evidence from tick data

Author:
by Q. Farooq Akram, Dagfinn Rime and Lucio Sarno
Series:
Working Paper
Number:
19/2008

Abstract

This paper investigates the validity of the law of one price (LOP) in international financial markets by examining the frequency, size and duration of inter-market price differentials for borrowing and lending services (`one-way arbitrage'). Using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, we nd that the LOP holds on average, but numerous economically significant violations of the LOP arise. The duration of these violations is high enough to make it worthwhile searching for one-way arbitrage opportunities in order to minimize borrowing costs and/or maximize earnings on given funds. We also document that such opportunities decline with the pace of the market and increase with market volatility.

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ISSN 1502-8190 (online)

Published 4 November 2008 16:08
Published 4 November 2008 16:08