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

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

Research output: Other Conference ContributionsConference Paper (other)Researchpeer-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 languageEnglish
Number of pages30
Publication statusPublished - 3 Jan 1999
Externally publishedYes
EventAmerican Economic Association Annual Meeting 1999 - New York Hilton Midtown, United States
Duration: 3 Jan 19995 Jan 1999
https://www.aeaweb.org/conference/1999

Conference

ConferenceAmerican Economic Association Annual Meeting 1999
Country/TerritoryUnited States
Period3/01/995/01/99
Internet address

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

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