Distance, border and the dynamic performance of the law of one price

ZHANG Hao1

(1.National Academy of Economic Strategy, CASS 100028)

【Abstract】Commodity prices are always changing, and the linkage of inter-region prices can reveal whether market mechanisms are effective or not. The author studies the realistic performance of the law of one price and its influencing factors from a dynamic point of view, and compares and analyzes them according to the characteristics of different products. Using the ten-day data on actual prices of more than 30 kinds of fresh farm products (divided into four categories) in nearly 100 prefecture-level cities from January 2014 to March 2015, the author measures the persistence of deviations from LOP between paired cities by the time series method. Furthermore, the quantities analysis of the influencing factors shows that distance, provincial borders and price stickiness are significantly and positively correlated with persistence of deviations from LOP; the border effect between neighboring provinces is roughly equivalent to a transport distance of 2600 kilometers. These factors have different effects in the regression on sub-divided products; the regression result on vegetables is closest to that on the full sample. The author constructs indexes to depict the distance characteristics and interprovincial relations of the occurrence and diffusion of price fluctuations, and the regional characteristics reflected can help explains such differences among products.

【Keywords】 distance; border effect; law of one price ; dynamic performance; price fluctuations;

【DOI】

【Funds】 Youth Project of National Social Science Foundation (15CJY059)

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(Translated by GUO Rongxing)

    Footnote

    [1]. ① 马克思恩格斯选集. Beijing: People’s Publishing House, 4 175 (1995). [^Back]

    [2]. ① 马克思恩格斯选集. Beijing: People’s Publishing House, 24 169 (1972). [^Back]

    [3]. ② The static method referred to in this paper for classification mainly focuses on the approach of processing price data, including the use of the static method to get continuous data, and, on this basis, an analysis of the dynamic trend is made, such as Gui (2006), and Bergin and Glick (2007). [^Back]

    [4]. ① 马克思恩格斯选集. Beijing: People’s Publishing House, 2 295 (1995). [^Back]

    [5]. ① It should be added that “the largest autoregressive root” was also used in much literature to measure the persistence (Stock, 1991; Pivetta and Reis, 2007), but the principle of the index is close to that of the unit root, and many criticisms were raised because the influences of non-largest autoregressive roots were not considered in the literature (Phillips, 1991; Andrews, 1993; Andrews and Chen, 1994). [^Back]

    [6]. ① In the results of pairing, some cities in set B may not paired in terms of the shortest distance, which will have the primary characteristics of first having biggest price fluctuations. The price fluctuations in these cities have little to do with the arbitrage behavior occurring due to price fluctuations in cities in the early stage. In calculating the average distance, they are not taken into account correspondingly, which is in line with the characteristics of required indexes in this paper. [^Back]

    [7]. ② Vegetables include 15 varieties: Chinese cabbage, green beans, carrots, cucumber, chili pepper, Chinese chives, turnip, eggplants, celery, green pepper, young garlic shoots, potatoes, tomatoes, oilseed rape, and cabbage. Fruits include five varieties: oranges, pears, apples, watermelons and bananas. Aquatic products include 7 varieties: grass carps, octopuses, marine shrimps, carps, crucian carps, bighead carps. Meat and eggs include chicken, eggs and pork (including the four sub varieties of hindquarter with skin, lean meat, ribs and rib meat), fresh beef (including the two sub-varieties of sirloin and sinew meat), fresh mutton (including those with and without bones as sub-varieties). The original data involve 100 prefecture-level cities, but two of them are excluded in the screening process; not all of them are listed in the paper due to space limitations. [^Back]

    [8]. ③ See the emergency notice of the Ministry of Transport, the National Development and Reform Commission and the Ministry of Finance on further improving the initiative of a green channel for fresh farm products (No. [2010] 715). Frozen hairtails and marine shrimps are chilled farm products, but in Hainan and other places they are also included in the “green channel” initiative. [^Back]

    [9]. ① There are two groups of qk,ij,t having invalid estimated results on ADF because autoregressive roots are located within the unit circle (see Hamilton, 1994). [^Back]

    [10]. ② The author takes Hainan as the adjacent province of Guangdong and Guangxi, and analyzes the relations of 75 paired neighboring provinces in China. [^Back]

    [11]. ① As mentioned above, the method of screening according to standard deviations mainly reflects the situation where prices fluctuate greatly, and the ranking by absolute deviations can reflect the overall situation of the whole sample period. Taking the one-period lagging case as an example, among the paired cities obtained in terms of diffusion in the shortest distance by the former method (ds = 0.5), 214 time points are missing mainly because no cities have price fluctuations at them; and 13 time points are missing in terms of screening and paring cities by the latter method (rs = 10). [^Back]

    [12]. ② In the statistical results by area, the average of price stickiness stickys 0.514 and 0.530, respectively in South China and East China, while it is 0.669 and 0.607, respectively in North China and Northwest China. [^Back]

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This Article

ISSN:1002-8102

CN: 11-1166/F

Vol 37, No. 07, Pages 5-20

July 2016

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Article Outline

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Abstract

  • 1 Introduction
  • 2 Analytical method and index construction
  • 3 The persistence of deviations from the LOP and its influencing factors
  • 4 Comparison among products and the explanation based on differences in price fluctuations
  • 5 Conclusion
  • Footnote

    References