The Impact of Quantitative Easing and Carry Trades on HKEX-listed Equities: Implications for Hong Kong’s Pegged Exchange Rate Regime

Abstract

This thesis examines how quantitative easing and carry-trade incentives affect equity markets in Hong Kong between 2010 and 2025, asking whether monetary expansion by the Fed, ECB and BoJ combined with US dollar-Hong Kong dollar carry-related incentives can help explain movements in Hong Kong equities. The analysis uses data on the Hang Seng Composite Index and selected sector-specific indices, combined with monetary base measures, forward-market variables, short-term interest rates and macroeconomic control variables. The research estimates baseline and controlled regression models for quantitative easing and a series of carry-trade regressions using interest-rate differentials and forward-implied measures to test whether external liquidity conditions and carry incentives are associated with Hong Kong equity performance. The results show that quantitative easing variables are more consistently associated with Hong Kong equities than the carry-trade measures, which remain largely insignificant across specifications. The findings imply that under a pegged exchange-rate regime, foreign monetary spillovers reflected through the monetary base may be transmitted more clearly through domestic asset markets than through simple bilateral carry-based return predictability, while also pointing to the need for future research using alternative quantitative easing measures, more granular sector analysis and broader carry-trade constructions.