This working paper was written by Cho-Hoi Hui (Hong Kong Monetary Authority), Chi-Fai Lo (The Chinese University of Hong Kong) and Ho-Yan Ip (The Chinese University of Hong Kong).Asymmetric behaviour has been documented in unemployment rates which increase quickly in recessions but decline...

Asymmetric behaviour has been documented in unemployment rates which increase quickly in recessions but decline relatively slowly during expansions. To model such asymmetric dynamics, this paper provides a rigorous derivation of the asymmetric mean-reverting fundamental dynamics governing the...

This paper presents a benchmarking model for validation of default probabilities of listed companies for Basel II purposes. The model is based on the recent studies on the predictive capability of structural credit risk models. Benchmark ratings and one-year default probabilities are assigned to...

An exchange rate model with crash risk is developed with the exchange rate confined in a wide moving band. A currency crash occurs when its exchange rate breaches a boundary. Using an asymmetric mean-reverting fundamental shock to incorporate intervention policy in the model, the log-normalised...

In a target-zone exchange rate system, both fundamentals and exchange rate expectations, reflected in interest rate differentials between the domestic and anchor currency, determine the exchange rate. However, the scope to capture exchange rate expectations is limited when policy rates are close...

This paper proposes a quasi-bounded process for exchange rate dynamics within a target zone, consistent with a credible exchange rate band in which the exchange rate cannot breach the strong-side limit while the weak-side limit is only accessible under restricted conditions of the relationship...

We present an exchange rate model in which a currency's exchange rate is confined in a wide moving band and a currency crash occurs when the rate breaches the lower boundary. A solution is derived from the standard log exchange rate equation for the model with a smooth-pasting condition at the...

When a currency’s appreciation expectation cannot be offset by lower interest rates which have fallen to the zero lower bound, the monetary authority needs to intervene to prevent currency appreciation due to capital inflows and resulting in foreign reserve accumulation. Based on a standard...

This working paper was written by Cho-Hoi Hui (Hong Kong Monetary Authority), Andrew Wong(Hong Kong Monetary Authority) and Chi-Fai Lo (The Chinese University of Hong Kong).This note uses a target-zone model to study the bond yield movements under yield curve control. The bond yield is assumed...