The Dynamic Relationship between the Investment Behavior and the Morgan Stanley Taiwan Index: Foreign Institutional Investors' Decision Process

Mei-Ling Chen, Kai-Li Wang (), Ya-Ching Sung, Fu-Lai Lin and Wei-Chuan Yang
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Mei-Ling Chen: Department of International Business Management, Da-Yeh University, Taiwan
Kai-Li Wang: Department of Finance, Tunghai University, Taiwan, 181, Sec. 3, Taichung-Kan Rd, Taichung, Taiwan
Ya-Ching Sung: Department of Business Administration, Da-Yeh University, Taiwan
Fu-Lai Lin: Department of International Business Management, Da-Yeh University, Taiwan
Wei-Chuan Yang: Department of International Trade, National Taichung Institute of Technology, Taiwan

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2007, vol. 10, issue 03, 389-413

Abstract: This research employs VAR models, impulse response function, forecast error variance decomposition and bivariate GJR GARCH models, to explore the dynamic relationship between foreign investment and the MSCI Taiwan Index (MSCI–TWI). The estimations of the VAR, impulse-response functions and predicted error variance decomposition tests show that stronger feedback effects exist between net foreign investment and MSCI–TWI. In particular, our results demonstrate that the MSCI–TWI has the greatest influence over the decision-making processes of foreign investors. Also, we see that exchange rates exert a negative influence on both net foreign investment dollars and the MSCI–TWI. In addition, US–Taiwan interest rate difference has a positive influence on net foreign investment dollars and a negative influence on the MSCI–TWI. As for asymmetric own-volatility transmission, negative shocks in the MSCI–TWI tend to create greater volatility for itself in the following period than positive shocks. Our research indicates an asymmetric information transmission mechanism from net foreign investment to MSCI–TWI markets. Moreover, the estimated correlation coefficient shows that MSCI–TWI and net foreign investment dollar have a positive contemporaneous correlation.

Keywords: Net foreign investment dollar; MSCI–TWI; exchange rates; interest rate; bivariate GJR GARCH models; JEL Classifications: C32; JEL Classifications: G15 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1142/S0219091507001124

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