How Credible Is Hong Kong's Currency Peg? Insights from Financial Market Prices

Urban J. Jermann, Bin Wei and Vivian Z. Yue

Policy Hub, 2025, vol. 2025, issue 5, 10

Abstract: This article presents a structural asset-pricing model that quantifies financial market perceptions of the credibility of Hong Kong's Linked Exchange Rate System (LERS). Using data from the foreign exchange market, the authors estimate the probability that the Hong Kong dollar (HKD) remains pegged to the US dollar (USD) and the value the HKD would take if the peg were to break. The analysis reveals multiple episodes when market confidence in the peg declined, with particularly sharp stress in late 2022 and mid-2025. In these periods, capital flows, interest rate differentials, and liquidity shocks drove market expectations of peg instability. The model identifies option prices as key forward-looking indicators of regime risk. This framework provides a real-time, market-based tool for monitoring currency peg credibility. The findings also offer policy-relevant insights into how global monetary shifts and local liquidity conditions shape perceptions of exchange rate stability.

Keywords: Hong Kong dollar; currency board; peg; exchange rate model; option prices (search for similar items in EconPapers)
JEL-codes: C83 D22 D70 F14 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:fip:a00068:102339

DOI: 10.29338/ph2025-05

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