TITLE:
Commodity Arbitrage and the Law of One Price: Setting the Record Straight
AUTHORS:
John Pippenger
KEYWORDS:
Exchange Rates, Arbitrage, Law of One Price, Borders, Half Lives, Auction Markets
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.5,
September
23,
2016
ABSTRACT: A general consensus rejects effective commodity
arbitrage and the law of one price. But this consensus is mistaken because it
is based on research using retail prices where price differentials do not
represent risk-free profits. Using commodity auction prices, a few articles
support effective arbitrage and the LOP. Using longer intervals and a wider variety of commodities than ever
before, this paper provides even stronger support for effective
commodity arbitrage and the Law of One Price. In addition, for the first time,
it uses commodity auction prices rather than retail prices to look for border
effects and rejects them.