The Credibility Of The Link From The Perspective Of Modern Financial Theory

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Executive Summary

Hong Kong's Linked Exchange Rate System (LERS) has been in operation for 25 years during which time many other fixed exchange rate systems have succumbed to shocks and/or speculative attacks. This fact alone suggests that the LERS is a robust system which enjoys a large measure of credibility in financial markets. This paper intends to investigate whether this is indeed the case, and whether it has been the case throughout its 25-year history. In particular the authors will use the tools of modern finance to extract information from financial-asset prices about market expectations that are related to the credibility of the LERS.

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