Topic: investigate whether the Law of One Price (LOP) holds for a certain primary commodity (coffee: Brazilian, Robusta and Other-Milds) that is traded in international markets

Order type: Dissertation
Subject: Economics
Academic level: Not specified
Style: Chicago
Language: English (U.S.)
In the context of your project will have to investigate whether the Law of One Price (LOP) holds for a
certain primary commodity (coffee) that is traded in international markets. This will be carried out
using time series techniques and monthly data (January1990 to April 2015) from four quality
differentiated coffee beans.

COFFEE BEANS INVESTIGATED:
Brazilian Naturals
Robusta
Other-Milds

Definitions of Coffee Beans as found in the International Coffee Organisation. For definition of the
Coffee Beans above, please refer to:
http://www.ico.org/glossary.asp

Also in my draft which I will upload.

report will consist of 5 (five) sections:

1. Introduction (explain why your investigation is important and how you will carry it out).
2. Methodology (a detailed presentation of the econometric tools you will employ).
3. Description of the Relevant Market (major producers, major consumers, trade flows).
4. The Data, the Empirical Models, and the Empirical Results.
5. Discussion and Conclusions.

I have USED R code for this. The results have been produced. I will upload this (R-code and results),
along with the data.

INTRODUCTION (2 pages)
I will send the papers the lecturer has given us for the theory, and application for this assessment.
REMINDER: the test of Law of One price is in regards to the 3 COFFEE BEANS: Brazlian Natural, Robusta
and Other Milds

I would like a 2 page introduction for Economic Theory of Law of One price, and the SCOPE of the
assignment in RELATION to COFFEE beans. As Introductions are.
Introduction
1. What the assessment sets out to achieve (please look at guidelines)
2. Theory regarding the economic theory of Law of One Price (LOP)
3. How the Law of One price will be tested with data of coffee beans: Brazilian Natural, Robusta and
Other Milds.
Methodology (2 pages) – I used ADF, augmented dicky fuller test. Please look at the R-code to see how
we used 2 versions to test for Law of One Price (LOP). A weak version – to see if series is stationary.
A strong version to see if the difference of the series is zero. If they coincide. I may have a
document written in word which has some information regarding this.
1. Hypothesis of the 2 tests: WEAK VERSION and STRONG VERSION
2. WEAK VERSION: if t-stat < Crit Value – NULL REJECTED, the series is stationary.
3. STRONG VERSION: same as above
4. Information on the Augmented Dicky Fuller Test: what it is used for. How this is used in the
objective of the assessment in testing LOP for the 3 coffee beans. I will send screenshot of the
formula for the ADF test in regards to this assessment. I am not sure if this is the formula in regards
to the assessment. Please look at it and decide.
5. The test will be conducted in 3 pairs.
BRAZILIAN – ROBUSTA
BRAZILIAN – Other-Milds
Other-Milds – Robusta
2 tests
WEAK VERSION:
To see if series is stationary. If so, NULL is rejected as it is not “non-stationarity”
In R Code the difference is “drift”
STRONG VERSION
EXAMPLE:
LogPriceBrazilian = LogPriceRobusta
In R Code the difference in “none”, so test to see if the prices coincide.
I am having difficulty in relating this to the Law of One Price. Please write how these 2 tests (which
are already conducted in R Code and sent) relate to the Law of One Price, how do they test for the law
of One Price?
In the results one of T-stats is near the Critical Value, but is marginally greater than the Critical
Value for the WEAK VERSION. Otherwise the test for all 3 pairs were stationary in the weak version of
the test. In the strong version, all tests showed the series were never stationary, in context of the
test – the never coincided, the difference was never zero. This is from the results section. I thought
I would include this, to help understand to write the methodology.
SOFTWARE: R Programming
with data of Brazilian, Other-Milds and Robusta means from January 1990 date till April 2015.

RELEVANT MARKETS (1 page)
Could you please add information regarding Trade Flows AND MAJOR CONSUMERS of each COFFEE BEAN to this
and rewrite for the sake of consistency. If not, the sections which are not written are more important.

4. The Data, the Empirical Models, and the Empirical Results. ( this will be sent. But could this
please be rewritten with greater quality and consistency?) (1 page)

Discussion and Conclusion (2 pages)

I will include the papers given to us to read. This should be sufficient.
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