The Law of One Price in Financial Markets

The Law of iodinness Price in Financial Markets Owen A. Lamont and Richard H. Thaler The Law of One Price is an stinting way of rational perspective to explain the expectation of equipment casualty unity of a particular commodity or say any political economy goods across national boundaries. The fair play tries to explain what a food grocery damage condition of a given goods should be, every last(predicate) things cosmos equal, across global boundaries. This law provide hold where every variable that has a precedent effect on price variation be held constant.That is where in that respect is absence seizure of transaction cost and no restriction or barrier to trades Lamont and Thaler (2003) experiment to use real word scenario to explain the functionality and effectiveness of the law of wholeness price. Under the assumption that the law could be realistic in completive trade with no transaction and barrier to trade cost. The point of interest is to affect whether th is law could be violated. Using the aspirin market as an compositors case, Lamont and Thaler argon able to justify that it is very easy to violate the law in a consumer goods market.There argon many factors that shape the consumer buying decision and rough of these factors can actually lead to the assault of the law of one price. exemplification of such factors may include consumer foreknowledge close to a product, influence of friends and family, perception about substitute goods or similar goods with brand variation. owe to the factors that influence consumers buying decision of a consumers goods, it is difficult for Arbitrageur to countenance any influence in consumer goods market thereby causing the violation of the law of one price .Lamont and Thaler says there exist no circularise way to sell curtly a consumer product and because of preconception about a consumer product by the consumer, it is very difficult to predict when consumer will see the error in their way. In most instances, consumers realize their mistakes during situation purchase evaluation Thaler and Lamont try to find see if the Law of one price is actually being kept in the financial market where there is room for short selling and transaction cost are pretty low. Using several examples from the financial arket, it is obvious that this law is being violated more often. Closed end investment fund or mutual fund case sighted by Thaler and Lamont might seems to be in violation of the Law of one price, but obviously from the analysis, the closed(a) end mutual fund security and the underlying asset are not identical. And the fee charge by a fund motorcoach for his service is somewhat rational. On the other hand, the ADR example using the Infosys example reflects the violation of the law of one price as obviously there are large discrepancies between the ii prices.In the case of Twin share of Ryal Dutch and Shell, it is surprising that Royal Dutch was selling at a higher value than Dell even though it is pretty a lot a share of the same company but after the promulgation that the US is dropping all foreign share, the market quickly reacted to the education and the premium on Royal Dutch dropped from 6% to 1% indoors 24 hours. Obviously, it the incident is a clear indication of the violation of the law of one price considering the fact that there are room for short selling and an ample opportunity for arbitrager to even get involvedConsidering all the cases presented by Thaler and Lamont, it is submitted that economists do need to focus more on whether the market is sending the right signal to the to the market participants or not. It can be concluded from the case studies that the law of one price should hold only if the same asset is selling at different price in different market simultaneously, then the arbitrageurs could step in take advantages of price differences which will allow it to make some pretty money for him/her self-importance before the mar ket get to equilibrium.However, it is logical to say that no two securities are completely identical. Nonetheless, it may be reasonable to say that arbitrageurs could until now make some decent living in the presence of fragile information in the financial market Work Cited Lamont, Owen A. and Richard H. Thaler. Journal of stinting PerspectivesVolume 17, Number 4Fall 2003Pages 191202