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Rationality and the Risk Premium on the Australian dollar

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  • Bruce Felmincham
  • Peter Mansfield

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]

Suggested Citation

  • Bruce Felmincham & Peter Mansfield, 1997. "Rationality and the Risk Premium on the Australian dollar," International Economic Journal, Taylor & Francis Journals, vol. 11(3), pages 47-59.
    • Handle: RePEc:taf:intecj:v:11:y:1997:i:3:p:47-59
    DOI: 10.1080/10168739700000018
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    Cited by:

    1. Felmingham, Bruce & Leong, SuSan, 2005. "Parity conditions and the efficiency of the Australian 90- and 180-day forward markets," Review of Financial Economics, Elsevier, vol. 14(2), pages 127-145.
    2. 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.
    3. Bruce Felmingham & SuSan Leong, 2005. "Parity conditions and the efficiency of the Australian 90‐ and 180‐day forward markets," Review of Financial Economics, John Wiley & Sons, vol. 14(2), pages 127-145.
    4. 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.
    5. Hakan Berument & Asli Günay, 2003. "Exchange Rate Risk and Interest Rate: A Case Study for Turkey," Open Economies Review, Springer, vol. 14(1), pages 19-27, January.

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