A Note on Estimating Realignment Probabilities -- A First-Passage-Time Approach

Cho-Hoi Hui and Chi-Fai Lo
Additional contact information
Cho-Hoi Hui: Research Department, Hong Kong Monetary Authority
Chi-Fai Lo: Research Department, Hong Kong Monetary Authority

No 809, Working Papers from Hong Kong Monetary Authority

Abstract: This paper proposes a path-dependent approach for estimating realignment probabilities of targeted exchange rates based on first-passage-time distributions instead of the commonly used path-independent approach. We consider that path dependency is an intrinsic characteristic of realignment risk because a realignment of an exchange rate can occur whenever a committed band by a central bank is breached. A mean-reverting lognormal process is considered in the first-passage-time approach. Based on market data of the British pound and mark during the ERM crisis of 1992, the realignment probabilities of the pound estimated under the proposed approach show that path dependency is quantitatively significant, compared with the path-independent approach.

Keywords: realignment risk; mean-reversion; first-passage-time probability (search for similar items in EconPapers)
JEL-codes: F31 G13 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2008-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP08_09_full.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hkg:wpaper:0809

Access Statistics for this paper

More papers in Working Papers from Hong Kong Monetary Authority Contact information at EDIRC.
Bibliographic data for series maintained by Simon Chan ( this e-mail address is bad, please contact ).