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Is the Hong Kong Dollar Exchange Rate "Bounded" in the Convertibility Zone?

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Author Info

  • Cho-Hoi Hui

    (Research Department, Hong Kong Monetary Authority)

  • Tom Fong

    (Research Department, Hong Kong Monetary Authority)

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    Abstract

    The empirical results show that after the introduction of the three refinements to the Linked Exchange Rate system in May 2005 the Hong Kong dollar follows a bounded process that is consistent with a fully credible exchange rate band. The bounded process will limit the movements of the exchange rate to between the strong- and weak-side limits because its variance vanishes at the Convertibility Undertakings making it inaccessible to the limits. The Hong Kong dollar does not show any strong tendency to revert towards the centre of the Convertibility Zone. This is perhaps not surprising as there have been no interventions in the foreign exchange market since May 2005. There may be few forces or incentives for market participants to drive the exchange rate towards 7.80.

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_13_full.pdf
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    Bibliographic Info

    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0713.

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    Length: 14 pages
    Date of creation: Sep 2007
    Date of revision:
    Handle: RePEc:hkg:wpaper:0713

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    Related research

    Keywords: Linked Exchange Rate system; target zone; mean reversion; bounded process;

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    Cited by:
    1. Dong He & Frank Leung & Philip Ng, 2007. "How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates?," Working Papers 0717, Hong Kong Monetary Authority.
    2. Laurence Fung & Ip-wing Yu, 2007. "Assessing the Credibility of The Convertibility Zone of The Hong Kong Dollar," Working Papers 0719, Hong Kong Monetary Authority.

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