Do unexpected changes in us discount rates convey information to the Australian stock market

Abstract

The study investigates whether US market expectations regarding United States Federal Reserve Board discount rate announcements arc common to Australia. The topic addresses the globalisation of information and the effect of United States' monetary policy announcements on smaller economies. The empirical analysis examines indices' daily returns during six days surrounding announcements from 1980 to 1996. The study greatly improves on the predictive capacity of previous models in determining the expected component of future discount rate announcements. Continued globalisation of world markets coupled with the increased access to foreign economic information leads to an expectation of reduced segmentation across market borders. The results suggest that even in the presence of asymmetric information. the Australian stock market reacts significantly to changes in the US discount rate.