Time Series Behaviour, Predictability and Speculation In the Hong Kong Foreign Exchange Market

The impact on exchange rates of the 1983 move from a conventional floating rate regime to a US dollar-linked regime in the Hong Kong foreign exchange market is investigated. The linked rate regime is a hybrid form of the fixed and floating rate regimes. Using data provided by 2 Hong Kong banks, the time series behavior of the exchange rate and the predictability and speculation opportunities under both the linked rate system and the immediately preceding floating rate system are examined. Three exchange rate forecasting models (lagged spot, Fisher parity, and forward rate) are analyzed in terms of forecasting accuracy and unbiasedness. The results show that the introduction of the new system: 1. greatly reduced the volatility of and serial dependence in exchange movements, 2. made possible the formation of accurate and unbiased forecasts of future spot rates, and 3. reduced the profit opportunities available for forward speculation.