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In economics, the law of one price (LOOP) states that in the absence of trade frictions (such as transport costs and tariffs), and under conditions of free competition and price flexibility (where no individual sellers or buyers have power to manipulate prices and prices can freely adjust), identical goods sold at different locations should be sold for the same price when prices are expressed ...
The same asset must trade at the same price on all markets ("the law of one price"). Where this is not true, the arbitrageur will: buy the asset on the market where it has the lower price, and simultaneously sell it on the second market at the higher price; deliver the asset to the buyer and receive that higher price
The law of one price [ edit ] In subsequent work in this field Persson investigated the operation of the law of one price , the idea that price differentials for a homogeneous good traded between two locations must equal the transport costs between the two markets.
The law of one price is weakened by transport costs and governmental trade restrictions, which make it expensive to move goods between markets located in different countries. Transport costs sever the link between exchange rates and the prices of goods implied by the law of one price.
By the law of one price, entirely tradable goods cannot vary greatly in price by location because buyers can source from the lowest cost location. However, most services must be delivered locally (e.g. hairdressing), and many manufactured goods such as furniture have high transportation costs or, conversely, low value-to-weight or low value-to-bulk ratios, which makes deviations from the law ...
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In the APT context, arbitrage consists of trading in two assets – with at least one being mispriced. The arbitrageur sells the asset which is relatively too expensive and uses the proceeds to buy one which is relatively too cheap. Under the APT, an asset is mispriced if its current price diverges from the price predicted by the model.
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