Currency board, Asian financial crisis, and the case for put options

Research output: Chapters, Conference Papers, Creative and Literary Works (RGC: 12, 32, 41, 45)12_Chapter in an edited book (Author)Not applicable

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Original languageEnglish
Title of host publicationExchange Rate Regimes and Macroeconomic Stability
EditorsLok-Sang Ho, Chi-Wa Yuen
Place of PublicationNew York
PublisherSpringer Science+Business Media
Pages185-214
ISBN (Electronic)978-1-4615-1041-3
ISBN (Print)978-1-4613-5365-2
Publication statusPublished - 2003

Abstract

The chapter reviews the circumstances under which speculative attacks on the currency board of Hong Kong occurred during the Asian financial turmoil. It is shown that the conventional defense mechanism via interest arbitrage has not functioned properly. An alternative approach of issuing put options to strengthen the currency board is evaluated. We show that the “technical” measures eventually undertaken by the Hong Kong Monetary Authority (HKMA) in September 1998 are functionally equivalent to issuing the put options, thereby providing a natural experiment of this idea. Based on credibility measures extracted from financial market data since the inception of the board in 1983, we find that interest rate arbitrage had been working properly until the rule-bound currency board was eroded by central bank-like, discretionary policies pursued by the HKMA. However, after implementing the put options proposal, which effectively put the HKMA back onto the rule-bound track, interest rate arbitrage appeared to be effective again.

Citation Format(s)

Currency board, Asian financial crisis, and the case for put options. / Lui, Francis T.; Cheng, Leonard K.; Kwan, Yum K.

Exchange Rate Regimes and Macroeconomic Stability. ed. / Lok-Sang Ho; Chi-Wa Yuen. New York : Springer Science+Business Media, 2003. p. 185-214.

Research output: Chapters, Conference Papers, Creative and Literary Works (RGC: 12, 32, 41, 45)12_Chapter in an edited book (Author)Not applicable