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Excess Returns in a Small Open Economy

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  • DAVID W. R. GRUEN
  • JEREMY SMITH

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. Our 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.

Suggested Citation

  • David W. R. Gruen & Jeremy Smith, 1994. "Excess Returns in a Small Open Economy," The Economic Record, The Economic Society of Australia, vol. 70(211), pages 381-396, December.
    • Handle: RePEc:bla:ecorec:v:70:y:1994:i:211:p:381-396
    DOI: 10.1111/j.1475-4932.1994.tb01857.x
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    2. Mardi Dungey & Adrian Pagan, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-342, December.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    4. 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.

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