Author: Luk, John
Title: An investigation on the effects of the Hong Kong dollar peg on the Hong Kong financial and real properties
Degree: D.B.A.
Year: 2001
Subject: Foreign exchange rates -- China -- Hong Kong
Real property -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department: Department of Management
Pages: 228 leaves : ill. ; 30 cm
Language: English
Abstract: This study investigates the effects of the Hong Kong Dollar Pegged Exchange Rate System, later called the Currency Board Scheme (hereafter called ' The Hong Kong Dollar Peg' or the 'HKS Peg") on the Hong Kong financial and real properties prices since its establishment in October 1983. With the relatively low US inflation rates and high HK inflation rates in the 1980's and 1990's extending through 1997, this created a negative interest rate effect in Hong Kong for a long period of time. During this period of time there were "well heated-up" markets in both financial and real properties in Hong Kong. This study investigates the effect and significance of the negative interest rate factor on these property and stock markets. The analysis is based on the classic Fama and Schwert framework to study the effects of expected and unexpected inflation rates on the rates of return of various investment assets. In order to get a better understanding of the various basic situations, the simpler Fisher framework analysis is carried out first to study the effect of the actual inflation rate on the rates of return of various investment assets. Under the Fisher framework, the rates of return series for financial and real properties are regressed against the actual inflation rate series. Under the Fama and Schwert framework, the return series for financial and real properties are regressed against the expected and unexpected inflation rates series. To investigate into the long-run response of inflation on property prices and stock prices, the cointegration method is used for the long-term equilibrium studies. We apply the Engle-Granger methodology followed by the Johansen methodology. Conclusions on the effects of the Hong Kong Dollar Peg on the inflation hedging properties of financial and real properties are drawn after the various corresponding results of the pre-Peg time series and the post-Peg time series are analysed, compared and contrasted. Based on the theories and methodologies used and the data available, this study shows, to the contrary of general speculation, that (i) the effect of the HK$ Peg on the Hong Kong financial and real properties is not positively significant with respect to the rates of return on investments in both financial and real properties, and (ii) there is no evidence to show that the HK$ Peg causes positive significance in the "heated up" markets in both the financial and real properties sectors. Nevertheless, this study shows a number of interesting findings. First, in the long run, from 1976 to 1997, the returns on Hong Kong stocks exhibit a perverse hedge against inflation following the general observations in some international markets. However, the study shows that, from 1976 to 1983, there was a positive hedge. On the other hand, from 1984 to 1997, there was a perverse hedge. Second, in comparison with financial properties (stocks), the rates of returns on real properties show better hedging properties against inflation in Hong Kong as shown, in particular, by the small to medium size urban residential properties data used in this study. Third, both stock data and residential properties data are cointegrated with inflation indices for the period from 1976 to 1997. This may show that both types of assets do provide protection against inflation in the long run. In conclusion, the HK$ Peg was introduced to ward off, as one of its goals, speculative pressures on the HK dollar, and to stabilise the exchange rate to the US dollar and other currencies. This was necessitated by the particular geographical, political and economic situations of Hong Kong. The introduction of the HK$ Peg eliminated certainly unmanageable fluctuations in the exchange rates. However, the property and stock markets continued to be subjected largely to those circumstances that in the first place necessitated the introduction of a fixed exchange rate in Hong Kong. The HK$ Peg was only one of the factors of consequence in variations of interest rate, inflation rates, or prices of stocks and real property that occurred after the Peg. The results obtained from this study support this argument. The main finding of this study is that, in opposite to general speculation or belief, the HK$ Peg is not a major factor that caused the overheating of the real property and financial markets in Hong Kong in the post-Peg years from October 1983 running up to 1997.
Rights: All rights reserved
Access: restricted access

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