Title: Does stock market volatility with regime shifts signal the business cycle in Taiwan?

Authors: Yih-Wen Shyu, Kuangyu Hsia

Addresses: Department of Business Administration, Chang Gung University, Kwei-Shan, Tao-Yuan 333, Taiwan. ' Research Department, Polaris Securities Corporation, 270, ChungHsiao E. Road, Taipei, Taiwan

Abstract: Using a Switching Regime ARCH (SWARCH) model and other time series models, this paper sets out to investigate the volatility of Taiwan|s monthly stock market returns, with the empirical results demonstrating that our SWARCH-L specification offers a better statistical fit to this leading stock market of the emerging economies. We also provide a clear confirmation of the causal relationship between stock return volatility and the business cycle. The smoothed probabilities for medium- and high-volatility regimes seem to lead to fluctuations in the coincident economic index, while a change in the coincident economic indicators precedes the filter probabilities for low-volatility regimes. Such evidence strongly reinforces the value of information provided by stock volatility, particularly in an anomalous or highly volatile manner, in signalling the fluctuations in Taiwan|s business cycle.

Keywords: stock volatility; Markov switching; business cycle; electronic finance; e-finance; stock market volatility; regime shifts; stock markets; Taiwan.

DOI: 10.1504/IJEF.2008.021804

International Journal of Electronic Finance, 2008 Vol.2 No.4, pp.433 - 450

Published online: 04 Dec 2008 *

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