The law of one price in Turkey

Official URL: http://risc01.sabanciuniv.edu/record=b1167364 (Table of Contents)

In this thesis, we use a panel dataset of 51 disaggragated good and service prices at montly frequency in 25 cities of Turkey to examine the working of the law of one price. First, we test whether intercity relative prices are stationary using panel econometric methods and find that a majority of the relative prices reject the null hypothesis of nonstationarity which indicate that the law of one price holds in Turkey. The evidence of stationarity of relative prices also lead us to estimate the speed of convergence. The results show that speed is highly fast compared to the findings for the US cities. Half-lives of convergence average around 4 months for tradable goods and 6.6 months for services. We also test the goodness of fit of TAR models versus AR(1) model and see that non-linear BAND-TAR specification characterize the data better than the linear AR(1) model. This result indicates that relative prices revert to the “band” rather than to the “zero” and the law of one price holds if data outside the band is stationary regardless of what process the data inside the band follow.