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Rationality and the Risk Premium on the Australian dollar

  • Bruce Felmincham
  • Peter Mansfield
Registered author(s):

    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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    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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