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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 Taylor & Francis Journals 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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    References

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    1. Kenneth D. West & Hali J. Edison & Dongchul Cho, 1993. "A utility based comparison of some models of exchange rate volatility," International Finance Discussion Papers 441, Board of Governors of the Federal Reserve System (U.S.).
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    3. Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. 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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    8. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
    9. John F. O. Bilson, 1981. "The "Speculative Efficiency" Hypothesis," NBER Working Papers 0474, National Bureau of Economic Research, Inc.
    10. Siegel, Jeremy J, 1972. "Risk, Interest, and Forward Exchange," The Quarterly Journal of Economics, MIT Press, vol. 86(2), pages 303-09, May.
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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 & Francis Journals, vol. 36(21), pages 2429-2441.

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