Examining the Volatility of Taiwan Stock Index Returns via a Three-Volatility-Regime Markov-Switching ARCH Model

Examining the Volatility of Taiwan Stock Index Returns via a Three-Volatility-Regime... This study adopts Hamilton and Susmel's (1994) Markov-switching ARCH (hereafter SWARCH) model to examine the volatility of the valued-weighted Taiwan Stock Index (hereafter TAIEX) returns. We also conduct sensitivity tests on comparison observations of Dow Jones and Nikkei stock indices. Our empirical findings are consistent with the following notions. First, the SWARCH model appears to outperform the competing ARCH and GARCH models in estimating the volatilities of TAIEX. Second, the three-volatility-regime setting is descriptive for TAIEX and Nikkei. In contrast with Hamilton and Susmel (1994), the contemporaneous Dow Jones adopted in this paper has only two regimes. Our test results suggest that the optimal number of volatility regimes is sensitive to the choice of sample periods. Third, our empirical results also lend an explanation to such phenomenon: the probability that TAIEX directly moves from a low (high) volatility regime to the high (low) volatility regime approaches zero, whereas TAEIX happened to be in a low volatility regime during the pre-financial-crisis period from April, 1996 to July, 1997. These can explain why Taiwan was one of Asia's few star performers compared with recession-hit neighbors during the first eighteen months of Asia's financial crisis. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Examining the Volatility of Taiwan Stock Index Returns via a Three-Volatility-Regime Markov-Switching ARCH Model

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Publisher
Springer Journals
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1024887315531
Publisher site
See Article on Publisher Site

Abstract

This study adopts Hamilton and Susmel's (1994) Markov-switching ARCH (hereafter SWARCH) model to examine the volatility of the valued-weighted Taiwan Stock Index (hereafter TAIEX) returns. We also conduct sensitivity tests on comparison observations of Dow Jones and Nikkei stock indices. Our empirical findings are consistent with the following notions. First, the SWARCH model appears to outperform the competing ARCH and GARCH models in estimating the volatilities of TAIEX. Second, the three-volatility-regime setting is descriptive for TAIEX and Nikkei. In contrast with Hamilton and Susmel (1994), the contemporaneous Dow Jones adopted in this paper has only two regimes. Our test results suggest that the optimal number of volatility regimes is sensitive to the choice of sample periods. Third, our empirical results also lend an explanation to such phenomenon: the probability that TAIEX directly moves from a low (high) volatility regime to the high (low) volatility regime approaches zero, whereas TAEIX happened to be in a low volatility regime during the pre-financial-crisis period from April, 1996 to July, 1997. These can explain why Taiwan was one of Asia's few star performers compared with recession-hit neighbors during the first eighteen months of Asia's financial crisis.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 4, 2004

References

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