Is the Hong Kong Dollar Exchange Rate 'Bounded' in the Convertibility Zone?
Hong Kong Monetary Authority Working Paper No. 13/2007
14 Pages Posted: 5 Oct 2007
Date Written: September 18, 2007
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.
Keywords: Linked Exchange Rate system, target zone, mean reversion, bounded process
JEL Classification: F31, G13
Suggested Citation: Suggested Citation