Exploring the Returns and Volatility Spillover Effect in Taiwan and Japan Stock Markets

Chi-Lu Peng, Chi-Fu Chung, Chin-Chang Tsai and Cheng-Te Wang

Asian Economic and Financial Review, 2017, vol. 7, issue 2, 175-187

Abstract: This study examined the returns on the Taiwan Capitalization Weighted Stock Index (TAIEX) and NIKKEI Stock Average Index (NIKKEI) and explored the volatility spillover effect between the Taiwanese and Japanese stock market. The results revealed cointegration between the two indices, suggesting a long-term, stable relationship between the two stock markets. An examination of inner-market effects showed that the returns on stock indices in both markets are greatly influenced by the returns of previous time periods. Additionally, a cross-market effect investigation showed that past returns on NIKKEI were found to affect the current returns on TAIEX significantly, while the past returns on TAIEX had no impact on the current returns on NIKKEI. A volatility analysis revealed the existence of an inner-market leverage effect, a negative cross-market volatility spillover effect, and a mutual price leading effect. According to the relative asymmetry analysis results, the two stock markets are more sensitive to falling than rising trends in the counterpart market. These results suggest that the two markets are more likely to crash due to a retreat in the counterpart market. The impact of previous volatility shocks on the current volatility of TAIEX and NIKKEI are 46.44 and 6.98 days, respectively.

Keywords: Bi-EGARCH; Co-integration test; Unit-root test; NIKKEI stock index; TAIEX stock index; Returns; Volatility spillover effect. (search for similar items in EconPapers)
Date: 2017
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