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Modeling the Taiwan Stock Market and International Linkages
Author(s) -
Chou Ray Y.,
Lin JinLung,
Wu Chungshu
Publication year - 1999
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.00081
Subject(s) - economics , volatility (finance) , stock market , econometrics , autoregressive conditional heteroskedasticity , spillover effect , stock (firearms) , heteroscedasticity , arch , financial economics , macroeconomics , mechanical engineering , paleontology , civil engineering , horse , engineering , biology
This paper analyzes the Taiwan stock market and examines its price and volatility linkages with those of the United States. In particular, it tests the hypothesis that the short‐term volatility and price changes spill over from the developed markets, mainly the United States, to the emerging Taiwan stock market. The model and the test are built upon Engle’s ARCH (autoregressive conditional heteroskedasticity) and Engle and Kroner’s M‐GARCH (multivariate generalized ARCH) models. The paper differs from previous studies on the Taiwan stock market in three respects. First, instead of using daily closing prices, it uses close‐to‐open and open‐to‐close returns to avoid the problem of overlapping samples. It carefully models the day‐of‐the‐week effect in daily data to avoid misspecification of the model. Second, to circumvent the generated regressor problem arising from the two‐step estimation procedure, it also employs the M‐GARCH model where all parameters are estimated simultaneously. Third, the misspecification test is carried out on various kinds of asymmetric ARCH factors. A substantial volatility spillover effect is found from the US stock market to the Taiwan stock market, especially for the model using close‐to‐open returns. There is also evidence supporting a spillover effect in price changes. The findings can be explained by the recent gradual opening of the Taiwan stock market to foreign investors.