Edith Cowan University
Place of Publication
Joondalup, Western Australia
Faculty of Business and Public Management
School of Accounting, Finance and Economics
This paper investigates whether current and future domestic and United States macroeconomic variables can explain long and short run stock returns in Australia. This is undertaken with a view to examining the potential implications of the Australia-United States Free Trade Agreement (AUSFTA). America is included in the analysis as a “foreign influence”. In the recent past it has been Australia’s second largest trading partner after Japan. The long run relationship tested in this study is based on the present value model of stock prices, which is tested using a range of cointegration and causality tests. These include the Johansen ML test, Long Run Structural Modelling, a Vector Error Correction Model and Variance Decomposition. A present value model based on domestic and external economic variables is estimated for the Australian market. American economic activity does not currently have a significant influence on Australian stock markets in the long run and is less influential than domestic economic activity. However, we would expect this to become more significant in the future, as a result of the dismantling of trade barriers in financial services and investments which will be associated with the implementation of AUSFTA.