This analysis demonstrates the impact of macroeconomic risk on interest rates in HKD, implying the need for adaptive arbitrage strategies.
This article conducts an in-depth examination of the concept of the 'mirror' effect within a sophisticated currency arbitrage framework, specifically applied to the Hong Kong Dollar (HKD) linked exchange rate system (LERS). It intricately analyzes the dynamic interactions between market forces and arbitrage activities that uphold the currency peg to the US Dollar (USD), with a particular emphasis on the innovative Mirror Risk-Rate (RR) arbitrage paradigm. The proposed model suggests that an escalation in perceived macroeconomic or geopolitical risk associated with the HKD precipitates a corresponding escalation in its domestic interest rates, exemplifying a "mirror effect”—a feedback mechanism that is crucial for the sustainability of the peg. Empirical analysis and rigorous theoretical discourse elucidate how this arbitrage mechanism facilitates a self-regulating process, effectively harnessing the 'invisible hand' of the market to preserve monetary stability, thereby reducing dependency on direct official interventions and canonical exchange rate policies.
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Lie Chun Pong (2025) studied this question.
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