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  5. Anomalies: The Law of One Price in Financial Markets

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

Anomalies: The Law of One Price in Financial Markets

  • Owen A. Lamont
  • Richard H. Thaler
Journal of Economic Perspectives
vol. 17, no. 4, Fall 2003
(pp. 191–202)
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Abstract

The Law of One price states that identical goods (or securities) should sell for identical prices. In financial markets the law of one price is thought to hold almost exactly, and is the basis for much of financial economic theory. We present evidence on several examples of violations of this law, including closed-end country funds, twin shares, dual class shares, and corporate spinoffs. We analyze the causes of these violations, and show they all stem from some limits on the extent to which rational arbitrageurs can intervene.

Citation

Lamont, Owen, A., and Richard H. Thaler. 2003. "Anomalies: The Law of One Price in Financial Markets." Journal of Economic Perspectives, 17 (4): 191–202. DOI: 10.1257/089533003772034952

JEL Classification

  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G15 International Financial Markets
  • G23 Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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