The Discrete Variation of the Risk Premium on the Australian Dollar

B S Felmingham and Michael Buchanan

Oxford Bulletin of Economics and Statistics, 1993, vol. 55, issue 3, 329-40

Abstract: This analysis finds that the spot and forward Australian dollar/U.S. dollar exchange rates are separated by a risk premium while information or new variables have no impact on this contemporaneous forecast error. The model is fitted to daily Australian data on spot and forward exchange rates in four subperiods and tests for parametric shifts indicate that the risk premium varies with important events affecting Australia's foreign exchange markets. These shifts add to the uncertainty of foreign exchange market transactions dissuading transactors from trading forward on the Australian dollar. Copyright 1993 by Blackwell Publishing Ltd

Date: 1993
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