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Excess Returns in a Small Open Economy

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Author Info

  • Gruen, David W R
  • Smith, Jeremy

Abstract

This paper presents detailed analysis of a very unusual event--a recent six-year period during which big excess returns were earned on the short-term interest-bearing assets of a small open economy: Australia. A risk premium does not explain the excess return. Rather than requiring a risk premium, market participants continually expected significant real depreciation of the Australian dollar, despite the fact that on average it appreciated in real terms. The authors' results may be a consequence of the foreign exchange market only gradually learning about the changed nature of the world capital market in the 1980s. Copyright 1994 by The Economic Society of Australia.

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Bibliographic Info

Article provided by The Economic Society of Australia in its journal The Economic Record.

Volume (Year): 70 (1994)
Issue (Month): 211 (December)
Pages: 381-96

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Handle: RePEc:bla:ecorec:v:70:y:1994:i:211:p:381-96

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Cited by:
  1. Palle Andersen & David Gruen, 1995. "Macroeconomic Policies and Growth," RBA Annual Conference Volume, in: Palle Andersen & Jacqueline Dwyer & David Gruen (ed.), Productivity and Growth Reserve Bank of Australia.
  2. Tom Crowards, 2002. "Defining the category of 'small' states," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(2), pages 143-179.
  3. Smith, Jeremy & Yadav, Sanjay, 1996. "A comparison of alternative covariance matrices for models with over-lapping observations," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 813-823, October.
  4. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.

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