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Dr. P.V. Viswanath |
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Stamp Arbitrage |
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Phil Izzo reckons there is no arbitrage when it comes to postage stamps. Today the price of stamps increased almost 5% to 44 cents in America. But the postage service offers something called a "forever stamp", which holds its value even as stamp prices increase. So are forever stamps a good investment? Mr Izzo thinks not because stamp prices increase with the rate of inflation, giving forever stamps a real rate of return of zero. But that assumes the price of stamps increases continuously. That is not the case—price increases occur in discrete intervals, no more than once a year and on a single day. That means if you bought forever stamps yesterday, today you would have experienced a 5% increase in a single day! So it would appear that if you time your forever stamp purchases to coincide with a price increase there is the potential to make a killing. But since the information is freely available, you'd also expect a secondary market of discount stamps to appear, which would drive the price back to the original level. Maybe that is why investors do not bother with stamp arbitrage and the post office can raise the price of postage. As a test of efficient markets, perhaps I should have bought lots of stamps yesterday and spent today standing outside my post office selling them at a discount. Next time. . |
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