Currency option traders usually use the Black-Scholes model in which the exchange rate follows a lognormal process. However, it is found that exchange rates may follow a mean-reverting process instead, for example, certain currencies are constrained to move inside target zones or under a...

This paper develops a multivariate time series model to forecast output growth and inflation in the Hong Kong economy. We illustrate the steps involved in designing and building a vector autoregression (VAR) forecasting model, and consider three types of VAR models, including unrestricted,...

This paper estimates the equilibrium path of the Hong Kong dollar real effective exchange rate (REER) and compares it with the actual path of the Hong Kong dollar REER to assess the extent of real exchange rate misalignment. Empirical results from various approaches of exchange rate assessment...

This paper first investigates whether there is a cointegration relationship between Hong Kong¡¦s consumption and wealth using the latest cointegration tests that allow for structural breaks. Our tests show there is only limited empirical support for the existence of a cointegration...

Increasing economic integration with Mainland China has contributed to the rapid expansion of service exports in Hong Kong. Growing at the current pace of 10-20% per annum, service exports would be a key contributor to GDP in the coming years, thanks to vibrant expansion in offshore trade and...

Recent surges of capital inflows to mainland China have prompted the People's Bank of China (PBoC) to improve its monetary management techniques. Increasing sophistication in open market operations has allowed the PBoC to sterilise the impact of foreign exchange intervention on domestic...

Recent debates on monetary condition and inflation pressures on the Mainland call for an analysis on the inflation dynamics and their main determinants. A natural starting point for the econometric analysis of monetary and inflation developments is the notion of monetary equilibrium. This paper...

This paper estimates pass-through of exchange rate changes to domestic inflation in Hong Kong in a two-step approach. We first estimate exchange rate pass-through to import prices and then from import price to domestic inflation using a Phillips-Curve model. We find that Hong Kong¡¦s exchange...

This paper proposes a path-dependent approach for estimating maximum appreciations of the renminbi expected by the market based on first-passage-time distributions. Using market data of the renminbi spot exchange rates, non-deliverable forward rates and currency option prices from 21 July 2005...

When US dollar interbank markets malfunctioned during the global financial crisis of 2008, many non-US financial institutions relied heavily on the foreign-exchange (FX) swap markets for US-dollar funds. This one-sided market induced a risk premium of the FX swap-implied US-dollar rate across a...