On the Dynamics of the HKD Exchange Rate Under Convertibility Undertakings

Abstract

The paper studies the statistical properties of the evolution of the USD/HKD exchange rate during the period after the separation of strong and weak side convertibility undertakings, when the rate is confined to a specified corridor. We suggest a discrete time Markov model for the exchange rate evolution. This model accommodates the empirical exchange rate distribution, associated transition probabilities, and the volatility of the historical exchange rate.