Covered interest arbitrage under the linked exchange rate: does it exist? An evidence from the Hong Kong foreign exchange market

Empirical studies of covered interest arbitrage suggest that the interest rate parity condtion is not always met and thus arbitrage profit apportunities do exist. As an international financial centre in the Asian Pacific region, the evidence on the validity of the relationship in the Hong Kong foregin exchange market is overwhelming. Allowing for transaction costs, we attempt to examine whether there exist unexploited profit opportunities in the Hong Kong foreign exchange market under the Hong Kong linked exchange rate system.