Risk premium, currency board, and attacks on the Hong Kong dollar

Leonard K. CHENG; Yum K. KWAN; Francis T. LUI

Risk premium, currency board, and attacks on the Hong Kong dollar

Leonard K. CHENG, Yum K. KWAN, Francis T. LUI

Research output: Other Conference Contributions › Conference Paper (other) › Research › peer-review

Abstract

Hong Kong’s “linked exchange rate” (also known as the “peg”) is a currency board system under which the Hong Kong dollar notes are fully backed by the U.S. dollar at the rate of HK$7.8 per US dollar. In this paper we present an event analysis of the credibility of the peg as measured by the forward premium recovered from forward exchange rates. Based on the forward premium from January 1997 to April 1999, the devaluation probability of the Hong Kong dollar as perceived by the foreign exchange market is calculated. We examine the evolution of credibility during this period using the theoretical framework of a target zone model. The relationship between Hong Kong dollar’s risk premium during the recent Asian financial crisis and four fundamental economic variables whose deterioration is widely regarded as conducive to currency crisis is explored.

Original language	English
Number of pages	30
Publication status	Published - 3 Jan 1999
Externally published	Yes
Event	American Economic Association Annual Meeting 1999 - New York Hilton Midtown, United States Duration: 3 Jan 1999 → 5 Jan 1999 https://www.aeaweb.org/conference/1999

Conference

Conference	American Economic Association Annual Meeting 1999
Country/Territory	United States
Period	3/01/99 → 5/01/99
Internet address	https://www.aeaweb.org/conference/1999

Bibliographical note

The work described in this paper was substantially supported by a grant from the Research Grant Council of the Hong Kong Special Administrative Region, China (Project No. HKUST 6217/97H).

Keywords

risk premium
forward premium
currency attack
currency board
Hong Kong dollar

Cite this

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title = "Risk premium, currency board, and attacks on the Hong Kong dollar",

abstract = "Hong Kong{\textquoteright}s “linked exchange rate” (also known as the “peg”) is a currency board system under which the Hong Kong dollar notes are fully backed by the U.S. dollar at the rate of HK$7.8 per US dollar. In this paper we present an event analysis of the credibility of the peg as measured by the forward premium recovered from forward exchange rates. Based on the forward premium from January 1997 to April 1999, the devaluation probability of the Hong Kong dollar as perceived by the foreign exchange market is calculated. We examine the evolution of credibility during this period using the theoretical framework of a target zone model. The relationship between Hong Kong dollar{\textquoteright}s risk premium during the recent Asian financial crisis and four fundamental economic variables whose deterioration is widely regarded as conducive to currency crisis is explored.",

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AU - KWAN, Yum K.

AU - LUI, Francis T.

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N2 - Hong Kong’s “linked exchange rate” (also known as the “peg”) is a currency board system under which the Hong Kong dollar notes are fully backed by the U.S. dollar at the rate of HK$7.8 per US dollar. In this paper we present an event analysis of the credibility of the peg as measured by the forward premium recovered from forward exchange rates. Based on the forward premium from January 1997 to April 1999, the devaluation probability of the Hong Kong dollar as perceived by the foreign exchange market is calculated. We examine the evolution of credibility during this period using the theoretical framework of a target zone model. The relationship between Hong Kong dollar’s risk premium during the recent Asian financial crisis and four fundamental economic variables whose deterioration is widely regarded as conducive to currency crisis is explored.

AB - Hong Kong’s “linked exchange rate” (also known as the “peg”) is a currency board system under which the Hong Kong dollar notes are fully backed by the U.S. dollar at the rate of HK$7.8 per US dollar. In this paper we present an event analysis of the credibility of the peg as measured by the forward premium recovered from forward exchange rates. Based on the forward premium from January 1997 to April 1999, the devaluation probability of the Hong Kong dollar as perceived by the foreign exchange market is calculated. We examine the evolution of credibility during this period using the theoretical framework of a target zone model. The relationship between Hong Kong dollar’s risk premium during the recent Asian financial crisis and four fundamental economic variables whose deterioration is widely regarded as conducive to currency crisis is explored.

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KW - forward premium

KW - currency attack

KW - currency board

KW - Hong Kong dollar

M3 - Conference Paper (other)

T2 - American Economic Association Annual Meeting 1999

Y2 - 3 January 1999 through 5 January 1999

ER -