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Is the Hong Kong Dollar Exchange Rate "Bounded" in the Convertibility Zone?

Cho-Hoi Hui and Tom Fong ()
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Cho-Hoi Hui: Research Department, Hong Kong Monetary Authority

No 713, Working Papers from Hong Kong Monetary Authority

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 (search for similar items in EconPapers)
JEL-codes: F31 G13 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2007-09
New Economics Papers: this item is included in nep-cba, nep-cna and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (11)

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