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

Yih-Wen Shyu and Kuangyu Hsia

International Journal of Electronic Finance, 2008, vol. 2, issue 4, 433-450

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. (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijelfi:v:2:y:2008:i:4:p:433-450

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