The Credibility of the Hong Kong’s Link from the Perspective of Modern Financial Theory

22 Pages Posted: 10 Feb 2009 Last revised: 23 Jan 2011

See all articles by Hans Genberg

Hans Genberg

University of Geneva - Graduate Institute of International Studies (HEI)

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Date Written: January 20, 2011

Abstract

Hong Kong’s Linked Exchange Rate system (LERS) has been in operation since 1983 during which time many other fixed exchange rate systems have succumbed to shocks and/or speculative attacks. This paper investigates how market participants assessed changes made to the LERS by using the tools of modern finance to extract information from financial asset prices about market expectations. These changes have been characterized as making the system less discretionary over time. We find that decreasing the discretionary element of the LERS led to an increase in credibility of the arrangement.

Keywords: Hong Kong dollar, Linked Exchange Rate system, target zone

JEL Classification: E42, G14

Suggested Citation

Genberg, Hans and Hui, Cho-Hoi, The Credibility of the Hong Kong’s Link from the Perspective of Modern Financial Theory (January 20, 2011). Journal of Money, Credit, and Banking, Vol. 43, No. 1, pp. 185-206, 2011. Available at SSRN: https://ssrn.com/abstract=1340287

Hans Genberg

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5928 (Phone)

Cho-Hoi Hui (Contact Author)

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

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