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Rationality and the Risk Premium on the Australian dollar

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  • Bruce Felmincham
  • Peter Mansfield
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    Abstract

    A Model of the forward rate error of the USD/AUD spot exchange rate is fitted to daily data for the period 15th December 1983 to 31st December 1991. This provides a data set of 2034 daily trading observations. Explanations of the forecast error include a risk premium represented by a constant plus the conditional variance generated from a GARCH (1,1)-M analysis of the error process and information variables in the form of lagged forward rate errors. The following conclusions are drawn form estimates for the full sample: the USD/AUD spot rate is subject to a constant premium: there is little evidence to support a time varying component and the market is influenced by lagged forward errors. Sub period estimation confirms these results, although a time varying premium is evident prior to the February 1985 depreciation. The economic implications of these findings are discussed. [F31]

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    Bibliographic Info

    Article provided by Korean International Economic Association in its journal International Economic Journal.

    Volume (Year): 11 (1997)
    Issue (Month): 3 ()
    Pages: 47-59

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    Handle: RePEc:taf:intecj:v:11:y:1997:i:3:p:47-59

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    1. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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    7. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
    8. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March.
    9. John F. O. Bilson, 1981. "The "Speculative Efficiency" Hypothesis," NBER Working Papers 0474, National Bureau of Economic Research, Inc.
    10. Tease, Warren J, 1988. "Speculative Efficiency and the Exchange Rate: Some Evidence since the Float," The Economic Record, The Economic Society of Australia, vol. 64(184), pages 2-13, March.
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    13. Felmingham, B S & Buchanan, Michael, 1993. "The Discrete Variation of the Risk Premium on the Australian Dollar," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 329-40, August.
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    Cited by:
    1. Han, Young Wook, 2007. "High frequency perspective on jump process, long memory property and temporal aggregation: Case of $-AUD exchange rates," Japan and the World Economy, Elsevier, vol. 19(2), pages 248-262, March.
    2. Hakan Berument & Aslý Günay, 2001. "Exchange Rate Risk and Interest Rate : A Case Study for Turkey," Departmental Working Papers 0110, Bilkent University, Department of Economics.
    3. Hakan Berument & N. Nergiz Dincer, 2004. "The effects of exchange rate risk on economic performance: the Turkish experience," Applied Economics, Taylor and Francis Journals, vol. 36(21), pages 2429-2441.

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