Swap Curve Dynamics in Hong Kong: An Interpretation

Abstract

This working paper was written by Salih N. Neftci (City University of New York).

This paper investigates the linkage between the USD and HKD swap curves. We argue that these curves contain important information, which is over and above that provided by the sovereign yield curves and the standard measures of market liquidity, Libor-type interest rates. Our work indicates that using sovereign yield curves and concentrating only on the risk premia associated with the breakdown of the currency peg is not sufficient for policy making in Hong Kong. Swap spreads and swap curves should be carefully monitored to evaluate economy wide risks and to conduct macroeconomic policy.

JEL Classification: G15, E44