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Excess Returns in a Small Open Economy *
Author(s) -
GRUEN DAVID W. R.,
SMITH JEREMY
Publication year - 1994
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1994.tb01857.x
Subject(s) - depreciation (economics) , excess return , economics , liberian dollar , risk premium , monetary economics , financial economics , small open economy , exchange rate , finance , market economy , human capital , financial capital , capital formation , paleontology , context (archaeology) , biology
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.