A Quasi-Bounded Target Zone Model – Theory and Application to Hong Kong Dollar

17 Pages Posted: 27 Nov 2012 Last revised: 29 Jun 2015

See all articles by Chi-Fai Lo

Chi-Fai Lo

The Chinese University of Hong Kong

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Tom Fong

Hong Kong Monetary Authority

S.W. Chu

The Chinese University of Hong Kong (CUHK)

Date Written: June 29, 2015

Abstract

This paper proposes a quasi-bounded process for exchange rate dynamics within a target zone, consistent with a credible exchange rate band in which the exchange rate cannot breach the strong-side limit while the weak-side limit is only accessible under restricted conditions of the relationship between the parameters of the drift term and stochastic part of the process. The empirical results suggest that this model can describe the dynamics of the Hong Kong dollar, which is operated under a target-zone system, where the drifting force is an increasing function of foreign reserves.

Keywords: stochastics process, target zone, bounded process

JEL Classification: F31, G13

Suggested Citation

Lo, Chi-Fai and Hui, Cho-Hoi and Fong, Tom and Chu, S.W., A Quasi-Bounded Target Zone Model – Theory and Application to Hong Kong Dollar (June 29, 2015). International Review of Economics & Finance, Vol. 37, 2015, 1-17. Available at SSRN: https://ssrn.com/abstract=2181355 or http://dx.doi.org/10.2139/ssrn.2181355

Chi-Fai Lo

The Chinese University of Hong Kong ( email )

Department of Physics
Shatin, N.T., Hong Kong
China

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

S.W. Chu

The Chinese University of Hong Kong (CUHK)

Shatin, N.T.
Hong Kong
Hong Kong

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