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Research Achievements

The Hong Kong Capital Market Research Center focuses on exchange rate changes under macroeconomic conditions. The following are the research results and progress in recent years:

Exchange rate changes and business cycle model

In traditional macro-financial models, the most representative view is that exchange rate changes are countercyclical. The principle is that the exchange rate is equal to the ratio of marginal utility and consumption of representative investors in each country. However, our research finds that this prediction is contrary to reality: in many countries, (real) exchange rates are positively related to economic output and consumption growth. This study provides a model that focuses on how the cyclical behavior of exchange rates changes with the source of economic shocks. A key feature of the model is incomplete markets, which introduce a gap between overall consumption and the average investor’s marginal utility. We also introduce exchange rate depreciation and the minimal deviation assumption of the endowment economy model: new resources created during the boom will only be randomly distributed to a small part of the population. Model results show that the average investor’s marginal utility may rise, causing the real exchange rate to appreciate. Our calibrated model replicates key features of the data well, in particular the joint dynamics of exchange rates, stock returns, real output and consumption growth, and trade flows.For more research details, please click: A Model of Pro-Cyclical Exchange Rates
Hong Kong has adopted a fixed exchange rate system in which the Hong Kong dollar is pegged to the U.S. dollar since 1983: the Hong Kong dollar exchange rate fluctuates within a small range based on the fixed exchange rate. The system has suffered several major shocks over the years. While the system has never failed in the past, the sustainability of the system in the long term deserves attention. The research purpose of this center will focus on this topic and conduct research and discussion on the risk of failure of the Hong Kong dollar exchange rate system.
China is the world’s second largest economy and the largest trading nation. As the trade between mainland China and other parts of the world has grown rapidly in the past decade or so, China has begun to gradually promote the internationalization of the RMB to reduce the transaction costs and exchange rate risks faced by enterprises in international trade, and to promote the integration between mainland China and the world. Cross-border financial transactions in other countries and regions. Against this background, the main purpose of this study is to compare market expectations and information contained in the onshore and offshore RMB markets based on market transaction data for RMB FX options. Specifically, the study aims to explore the formation mechanisms of onshore and offshore exchange rates. Specific research currently focuses on the following issues: The pricing deviation between onshore and offshore exchange rates is very small, but the option implied volatility of the offshore RMB exchange rate is significantly greater than the onshore RMB exchange rate. So, are offshore participants more vulnerable than onshore participants? Risk aversion? In other words, is the risk-neutral measure of the offshore RMB exchange rate indeed different from the risk-neutral measure of the onshore RMB exchange rate? How does the information in the two RMB markets differ?
Special Seminar: Special Seminar: Current Situation of Hong Kong Dollar Exchange Rate and Derivatives Market