Chung-Hua Shen

Same Financial Development Yet Different Economic Growth: Why?

We re-study the relationship between financial development and real GDP per capita growth in 48 countries. What we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable, if not negative, effect on growth. We examine whether or not these impacts are a product of various financial and economic conditional variables. Our conditional variables consist of financial liberalization, two sets of country development dummies, crises in banking and currency dummies, the creditor protection index as well as the anti-director and corruption indices. Our results clearly show that the conditional variables of financial liberalization, high-income level, and good shareholder protection mitigate the negative impacts of banking development on growth. In contrast, the conditional variables of middle-income level, regional Latin American, Sub-Saharan African and East Asian dummies, banking and currency crises, good creditor protection, and higher corruption strengthen the negative impacts of banking development on growth. Next, the conditional variables of middle-income level, Latin American, Sub-Saharan African, and East Asian dummies strengthen the positive impacts of stock market development on growth, whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth. Last, we find that the relationship between growth and bank development is better described as a weak inverse Ushape. This inverse U-shape becomes stronger when additional stock market variables are squared. Thus, financial development and growth may, in fact, be in a nonlinear form.

Daily serial correlation, trading volume and price limits: Evidence from the Taiwan stock market

Abstract The relationship among daily stock return autocorrelation, trading volume, and price limits are investigated in this paper. Twenty-four Taiwan individual stocks are adopted here. We found that increasing the volume reduces the daily autocorrelation for nearly half of the stocks. This negative volume effect is contrary to the positive price-limit effect, which strengthens the autocorrelation. We use OLS, generalized autoregressive conditional heteroscedasticity (GARCH) and generalized method of moment (GMM) to investigate the sensitivity of the estimation results. Our results display robustness across estimation methods.

An empirical study of the asymmetric cointegration relationships among the Chinese stock markets

The Enders and Siklos asymmetric cointegration test is employed to examine the long-run asymmetric equilibrium relationships between the Chinese Shanghai and Shenzhen stock markets. Three samples are adopted, which are the whole sample (October 1992 to September 2002); the first subsample before B shares were opened up to the Chinese public (October 1992 to February 2001); and the second subsample after B shares were opened up (February 2001 to September 2002). The estimated results are as follows. First, when the conventional Engle–Granger symmetric cointegration test is used, only the A shares in Shanghai and Shenghen stock exchange market are cointegrated when using the whole sample and the first subsample. However, with the Enders–Siklos M-TAR asymmetric cointegration test, Shenzhen A and B shares stock prices have an asymmetric cointegration relationship after B shares were open, suggesting that openness increases the market efficiency. Furthermore, the two A shares in Shanghai and Shenzhen stock exchanges also have an asymmetric cointegration relationship in the whole sample and the first subsample, implying that although the asymmetric relationship is crucial, it has long been neglected. Finally, it is found that the adjustment speed of Shanghai A shares is faster when deviation from the long-run equilibrium is positive than when it is negative.

Monetary policy as a decision-making hierarchy: The case of Taiwan

Abstract We apply a threshold autoregressive model to a reaction function of the central bank of Taiwan to see if it responds differently to its policy objectives when the severity of inflation differs. We locate three thresholds and thus four inflation regimes. In the regime with essentially no inflation, the central bank responds to both output and inflation. In the low inflation regime, it responds countercyclically to output, but shows no response to inflation. In the moderate and high inflation regimes, it increasingly responds to inflation, but not to output. Our results of an asymmetric policy response are consistent with the central banks public statements.

Impact of Foreign Bank Entry on the Performance of Chinese Banks

This study investigates how foreign bank/investor penetrations influence local bank performance in China. At the country level, foreign bank penetration is proxied by MacroFP, measured by the percentage of banks with foreign strategic investors (FSI) among total banks. At the bank level, foreign bank penetration is proxied by MicroFP, measured by the percentage shareholding of FSI in a bank. When foreign bank penetration is proxied by MacroFP, it is found to improve the profitability of local banks but not to reduce costs. Next, when foreign bank penetration is proxied by MicroFP, it is found to affect neither profitability nor costs. In sum, the present study demonstrates that the opening-up policy is correct from a macro perspective. However, for banks that have introduced FSI, determining the reasons for improvements in performance being inhibited is more important than releasing more shares to foreign investors.

What Makes International Capital Flows Promote Economic Growth? An International Cross-Country Analysis

This paper re-examines the relationship between international capital flows and economic growth within the context of various ‘conditional factors’ that possibly have the potential to influence such relationships. It achieves this by employing panel data for 80 countries that cover 1976–2007. International capital inflow is broken down into foreign direct investments (FDI) and foreign portfolio investments (FPI). We find interesting evidence that only FDI has a positive effect on growth and that FPI has an unfavorable, if not negative, effect on growth. The conditional variables of banking liberalization, high-income level, twin crises, lower corruption, and human capital mitigate the positive impacts of FDI on growth. In contrast, the middle-income level and good shareholder protection have a positive effect. As concerns FPI, the level of financial liberalization, being in a Latin American region, the wealth of countries, and market governance all influence the way that FPI affects growth, whereas the conditional variables of twin crises and human capital do not influence the effect of FPI on economic growth.

Cost Efficiency and Banking Performances In a Partial Universal Banking System: Application of the Panel Smooth Threshold Model

This paper studies the cost efficiency of bank in a partial universal banking system (PUBS), Taiwan. Instead of assuming one common technology in the bank cost function, two technologies are assumed to be imbedded in the cost function. Fee revenues are used as threshold to divide the banks into two technologies. A bank whose fee revenues exceeding the threshold is designated as universal bank technology while falling below the threshold is designated as traditional deposit-loan technology. The panel smooth transition model is adopted, which allows banks to smoothly adjust between the two technologies. Two criteria are suggested, overbanking and the trend-toward-fee revenues, to assess the new models performances. With respect to scale economies, the results do find a panel smooth transition model yield more reasonable results than the conventional OLS and random effect of panel data approach. Based on the panel smooth transition model, the optimal fixed asset size is around ten billion New Taiwan dollars.

Do foreign investments affect foreign exchange and stock markets - the case of Taiwan

Foreign investment (FI) has been identified with a recent spate of speculative attacks on certain foreign currencies, giving rise to several financial crises. The issue of whether or not FI has destabilization or demonstration effects on the stock and foreign exchange markets has therefore received widespread attention in developing countries. The destabilization effect focuses on whether FI increases or decreases the volatility of stock prices and foreign exchange markets. The demonstration effect stresses that because FI focuses more on fundamental factors than nonfundamental factors, the major influencing factors on stock markets may change after FIs are permitted to enter into a country. The experience of Taiwan in this regard can function as a guide for other developing countries. This paper finds, regarding the destabilization effect, that FI has a positive influence on the volatility of the exchange rate and a mild influence on the volatility of stock returns. These results imply that challenges will probably emerge during the process of liberalization, such as increased volatility in stock returns and in the exchange rate. Next, with regard to the demonstration effect, our results show that prior to the inflow of FI, stock returns are mainly affected by nonfundamental factors, such as the turnover rate. After the inflow of FI, stock returns are affected by both nonfundamental and fundamental elements.

Are Crisis-Induced Devaluations Contractionary?

Why are some currency crises followed by economic contractions while others are not? This paper is an attempt at answering this query. In particular, we investigate two closely related questions. First, we explore whether there is a difference in the output effects of a devaluation during “normal” periods versus crises ones; after all, during noncrisis periods, real exchange devaluation is seen as an important policy option for promoting exports and output growth. Yet, the literature has not made a distinction between crisis and noncrisis periods. To preview the main conclusion, we find that the contractionary effects tend to exist only during the crisis period. Building on this, we go one to explore the factors that cause a crisis-induced devaluation to be contractionary.

GARCH, jumps and permanent and transitory components of volatility: the case of the Taiwan exchange rate

This paper investigates whether there are three distinctive features in financial asset prices, that is, time-varying conditional volatility, jumps and the component factors of volatility. It adopts a component-GARCH-Jump, which can efficiently capture the three features simultaneously. Our results demonstrate that the three features exist in the Taiwan exchange rate. Besides time-varying conditional volatility, our model identifies 172 jumps between 5 January 1988 and 21 March 2003. The empirical evidence shows that the permanent component of the conditional variance is a relatively smooth movement except for a fairly sharp shift which began in 1997. This means that the effect of the Asian crisis shock might very well have exerted not only a transitory jump effect, but also a permanent effect on Taiwans exchange rate.