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Market Expectation of Appreciation of the Renminbi

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Author Info

  • Cho-Hoi Hui

    (Research Department, Hong Kong Monetary Authority)

  • Chi-Fai Lo

    (Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong)

  • Tsz-Kin Chung

    (Department of Physics, The Chinese University of Hong Kong)

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    Abstract

    This paper proposes a path-dependent approach for estimating maximum appreciations of the renminbi expected by the market based on first-passage-time distributions. Using market data of the renminbi spot exchange rates, non-deliverable forward rates and currency option prices from 21 July 2005 (the reform of the exchange rate regime) to 28 February 2008 for model parameters, the maximum appreciations of the renminbi estimated under the proposed approach show that the market expected another large movement of the exchange rate during the 14 months after the reform. Subsequently, the few occasions of appreciations beyond the expected maximums coincided with trade-related issues and speculation that greater momentum of appreciation would be allowed by the authorities. The PBoC¡¦s measures were however largely incorporated into the derivatives¡¦ prices. The proposed approach can be used to gauge the range of appreciations of the renminbi anticipated in the market and to identify any exchange rate movements beyond market expectations.

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP08_03_full.pdf
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    Bibliographic Info

    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0803.

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    Length: 18 pages
    Date of creation: Apr 2008
    Date of revision:
    Handle: RePEc:hkg:wpaper:0803

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    Related research

    Keywords: renminbi exchange rate; first-passage-time distributions; currency options;

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    2. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
    3. Roberta Colavecchio & Michael Funke, 2007. "Volatility dependence across Asia-Pacific on-shore and off-shore U.S. dollar futures markets," Quantitative Macroeconomics Working Papers 20708, Hamburg University, Department of Economics.
    4. Söderlind, Paul, 1997. "Market Expectations in the UK Before and After the ERM Crisis," Working Paper Series in Economics and Finance 210, Stockholm School of Economics, revised 01 Sep 1998.
    5. McKinnon, Ronald, 2006. "China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience," ZEW Discussion Papers 06-35, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Ronald McKinnon, 2006. "China'S Exchange Rate Appreciation In The Light Of The Earlier Japanese Experience," Pacific Economic Review, Wiley Blackwell, vol. 11(3), pages 287-298, October.
    7. JosÈ B. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "ERM bandwidths for EMU and after: evidence from foreign exchange options," Economic Policy, CEPR & CES & MSH, vol. 12(24), pages 53-89, 04.
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