Spot and Futures Prices and the Law of One Price




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    • Federal Reserve Bank of Philadelphia and The Wharton School, University of Pennsylvania; and Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee. This research has been supported by a grant from the Columbia Center for the Study of Futures Markets and by the Dean's Fund for Faculty Research at the Owen Graduate School of Management. For their research assistance, we thank Jeff Babbin, Joe Cummins, Michael Dee, David Griffin, Dennis Goldman, and Nancy Taylor. The helpful comments of Michael Brennan and Orlin Grabbe are gratefully acknowledged.


The law of one price (LOP) is tested for narrowly defined commodities traded in futures markets in different countries during the period 1973–80. Although the LOP holds as an average tendency for most of the commodities, there are instances of large riskless arbitrage returns (before transactions costs). Deviations from the LOP tend to be commodity specific rather than due to a common external factor and they tend to be smaller the longer the maturity of the futures contract.