Interest rate parity (both covered and uncovered) is a well-established relationship in international finance. This theory has led by analogy to the suggestion that an equivalent relationship would exist for share returns. This paper explores such a share return parity relationship for the Australian and US share markets. An initial estimation suggests that Australian share returns do not fully reflect movements in US share returns. There are a number of explanations for this result. First, since market participants must react to expected returns, the expectations generating mechanisms (including that for changes in exchange rates) used in Australia and the United States may differ. Secondly, Australian and US shares may not be perfect substitutes. In particular, they may be perceived to have different risk characteristics. When this possibility is taken into account, a good explanation is obtained. The results throw some light on the desirability of offshore investment for Australian investors. However, the problem of proxying for expectations remains.
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