Tests For Market Integration and the Law of One Price: The Market For Whitefish in France

Abstract

This paper examines the relationship between causality models and cointegration models in testing for price integration and the Law of One Price (LOP). In our review, we show that cointegration models, which allow for nonstationarity in prices, are a natural extension of the traditional causality methods and not an alternative approach. Hence, the two approaches investigate the same economic hypotheses; however, the choice of modeling method depends on the time series properties of the data. An empirical analysis is provided using prices from the whitefish market in France. With nonstationary price data, the causality approach over rejects the hypothesis of the LOP, whereas conintegration models provide evidence for a well-integrated whitefish market. A generalized version of the composite commodity theorem holds, and prices of most whitefish species can be aggregated into a single commodity price index.

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