Swap curve dynamics across markets: Case of US dollar versus HK dollar

This paper investigates the extent of swap curve dynamics across USD and HKD markets. We find that US Treasury curve invokes significant positive responses on HKD swap curve due to the existence of the currency peg system. Our work also indicates that Hong Kong swap curve itself contains rich information over and above that provided by the sovereign yield curve and the standard measure of market liquidity, Libor-type interest rates. Hence, using sovereign yield curves and concentrating only on the risk premium associated with the breakdown of the currency peg is not sufficient for policy making. Swap spreads and swap curves should be carefully monitored to evaluate economy wide risks and to conduct macroeconomic policy, especially in a private sector dominated economy, such as Hong Kong.