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Market Expectation of Appreciation of the Renminbi

Author

Listed:
  • 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)

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.

Suggested Citation

  • Cho-Hoi Hui & Chi-Fai Lo & Tsz-Kin Chung, 2008. "Market Expectation of Appreciation of the Renminbi," Working Papers 0803, Hong Kong Monetary Authority.
    • Handle: RePEc:hkg:wpaper:0803
    as

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP08_03_full.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Paul Söderlin, 2000. "Market Expectations in the UK Before and After the ERM Crisis," Economica, London School of Economics and Political Science, vol. 67(265), pages 1-18, February.
    3. Ekvall, Niklas & Peter Jennergren, L. & Naslund, Bertil, 1997. "Currency option pricing with mean reversion and uncovered interest parity: A revision of the Garman-Kohlhagen model," European Journal of Operational Research, Elsevier, vol. 100(1), pages 41-59, July.
    4. 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 637-654, May-June.
    5. 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.
    6. Colavecchio, Roberta & Funke, Michael, 2007. "Volatility dependence across Asia-Pacific on-shore and off-shore U.S.dollar futures markets," BOFIT Discussion Papers 17/2007, Bank of Finland Institute for Emerging Economies (BOFIT).
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    Cited by:

    1. Genberg, Hans & Hui, Cho-Hoi, 2008. "The credibility of 'The Link' from the perspective of modern financial theory," IMFS Working Paper Series 18, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).

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    More about this item

    Keywords

    renminbi exchange rate; first-passage-time distributions; currency options;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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