RESPONSE OF FINANCIAL MARKETS TO ANNOUNCEMENTS OF THE AUSTRALIAN CURRENT ACCOUNT BALANCE

Abstract

Abstract This paper documents the response of exchange rates, interest rates and stock prices to monthly announcements of the Australian current account balance. Survey data on market participants' expectations and forecasts generated from ARIMA time series models are used to identify the unexpected component of the announcements. The study also controls for day‐of‐the‐week effects that have been documented in the Australian equity market The results support the efficient market hypothesis and show a significant depreciation of the Australian dollar in foreign exchange markets and a significant rise in both short‐ and long‐term interest rates to announcements of larger than expected current account deficits. The study was, however, unable to find evidence of a significant stock price response to the current account announcements.