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How Credible Is Hong Kong's Currency Peg? Insights from Financial Market Prices

Author

Listed:
  • Urban J. Jermann
  • Bin Wei
  • Vivian Z. Yue

Abstract

This article presents a structural asset-pricing model that quantifies financial market perceptions of the credibility of Hong Kong's Linked Exchange Rate System (LERS). Using data from the foreign exchange market, the authors estimate the probability that the Hong Kong dollar (HKD) remains pegged to the US dollar (USD) and the value the HKD would take if the peg were to break. The analysis reveals multiple episodes when market confidence in the peg declined, with particularly sharp stress in late 2022 and mid-2025. In these periods, capital flows, interest rate differentials, and liquidity shocks drove market expectations of peg instability. The model identifies option prices as key forward-looking indicators of regime risk. This framework provides a real-time, market-based tool for monitoring currency peg credibility. The findings also offer policy-relevant insights into how global monetary shifts and local liquidity conditions shape perceptions of exchange rate stability.

Suggested Citation

  • Urban J. Jermann & Bin Wei & Vivian Z. Yue, 2025. "How Credible Is Hong Kong's Currency Peg? Insights from Financial Market Prices," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2025(5), pages 1-10, September.
    • Handle: RePEc:fip:a00068:102339
    DOI: 10.29338/ph2025-05
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    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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