Edited by M. A.B. Siddique
Chapter 9: AUSFTA and its Implications for the Australian Stock Market
David Allen, Lee K. Lim and Trent Winduss INTRODUCTION The relationship between economic fundamentals and stock returns in developed markets such as the United States of America (USA) and Europe has been well researched; (Fama 1990; Schwert 1990; Nasseh and Strauss 2000; Chen et al. 1986; Cheung and Ng 1998; Choi et al. 1999; Chen 1991). However the role of the economy in stock returns in the Australian market is not nearly as well documented. Attention to this issue is particularly timely, given the recently arranged Free Trade Agreement between Australia and the USA. A possible implication of this agreement is that the capital markets and ﬁnancial services sectors in Australia and in the USA will become more closely integrated. One of the purposes of this chapter is to take stock of how things stand at the moment in terms of the linkages between the Australian and US capital markets. Bilson et al. (2001) address this general issue in an international context using the multivariate model below including local factors and global factors to explain realized returns in 20 emerging markets. Rit ϭ ␣i ϩ G ijt ͚ ␤imFimt ϩ ͚␥ij FL ϩ it jϭ1 G L (9.1) mϭ1 where Rit, FG , FL , represent return, a set of global factors and a set of local imt ijt factors, respectively. More speciﬁcally Bilson et al. (2001) selected the return on a value weighted world index and based on past evidence selected narrow money (M1), exchange rate, industrial production and the consumer price index...
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