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

See all articles by Cho-Hoi Hui

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Tom Fong

Hong Kong Monetary Authority

Date Written: September 18, 2007

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.

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

JEL Classification: F31, G13

Suggested Citation

Hui, Cho-Hoi and Fong, Tom, Is the Hong Kong Dollar Exchange Rate 'Bounded' in the Convertibility Zone? (September 18, 2007). Hong Kong Monetary Authority Working Paper No. 13/2007. Available at SSRN: https://ssrn.com/abstract=1019432 or http://dx.doi.org/10.2139/ssrn.1019432

Cho-Hoi Hui (Contact Author)

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Tom Fong

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre, Central
Hong Kong
Hong Kong

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