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Article

Open Access

Modelling the Term Structure of Hong Kong Inter-Bank Offered Rates (HIBOR)

Author(s)

Sandy Chau, Andy Tai, Wilson Kwan

Full-Text PDF Download XML 1068 Views

DOI:10.17265/2328-7144/2016.01.002

Affiliation(s)

Sandy Chau, Ph.D., senior lecturer, School of Professional Education and Executive Development, The Hong Kong Polytechnic University, Hong Kong, China.
Andy Tai, Ph.D., senior lecturer, Hong Kong Community College, The Hong Kong Polytechnic University, Hong Kong, China.
Wilson Kwan, Ph.D., lecturer, Hong Kong Community College, The Hong Kong Polytechnic University, Hong Kong, China.

ABSTRACT

Different single-factor models are used to estimate the term structure of Hong Kong Inter-Bank Offered Rates (HIBOR). These models use stochastic differential equations which effectively reflect market characteristics of short- and long-term interest rates, such as capability of mean reversion and interest rate level fluctuation. For the period from 2005 to early 2007, the economy of Hong Kong had been relatively stable with pretty low volatilities in interest rate. However, starting from 2008 to beginning of 2012, the Hong Kong and the world economies had been steering from relatively stable to fluctuations, the 2008 financial tsunami initiated by the U.S. had been causing financial instability globally. With the U.S. government taking quantitative easing monetary policy, U.S. interest rates fluctuated and submerged rapidly. Volatility of HIBOR was extremely sensitive to fluctuation of U.S. interest rates, since Hong Kong dollar exchange rate has been pegged with U.S. dollar. In short, during the period of early 2008 to early 2012, volatility of short-term interest rate was extremely sensitive. Obviously, the term structure of interest rate for these two periods had made major shift, combining the two periods would lead to unfavorable econometric results.

KEYWORDS

Hong Kong Inter-Bank Offered Rates (HIBOR), dynamic interest rate term structure models, short-term interest rate volatility

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