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Title: Risk premium, currency board, and attacks on the Hong Kong dollar
Authors: Cheng, Leonard Kwok-Hon
Kwan, Yum K.
Lui, Francis T.
Keywords: Risk premium
Forward premium
Currency attack
Currency board
Hong Kong dollar
Issue Date: 1999
Series/Report no.: Working Papers ; 9901
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 December1998, 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.
Appears in Collections:CED Working Papers

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