Shyh-Wei Chen

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.

Evidence of the duration-dependence from the stock markets in the Pacific Rim economies

This article investigates the duration-dependent feature of five Pacific Rim economies. The duration-dependent Markov Switching model is employed to achieve this objective. The Savage–Dickey density ratio is also computed in support of the duration-dependent Markov switching model. The possible bull and bear market dates for each stock market are also identified by the posterior probability from the empirical model. It is unambiguous that Japan, South Korea and Hong Kong are all characterized by duration-dependence in a bear market but no duration-dependence in a bull market. In the case of Taiwan and Singapore, the duration-dependence feature holds for both the bear and bull markets.

Identifying Turning Points and Business Cycles in Taiwan: A Multivariate Dynamic Markov-Switching Factor Model Approach

This paper builds upon the ideas proposed by Diebold and Rudebusch (1996) and estimates a multivariate dynamic Markov-switching factor model for a vector of macroeconomic variables. The approach captures both the idea of the business cycle as expressing co-movement in several macroeconomic variables as well as the asymmetric nature of business cycle phases. We transform the empirical models into state-space representation, and adopt Kim’s (1994) algorithm to implement the estimation. The empirical results suggest that the business chronologies identified by the multivariate Markov-switching factor model in terms of GDP, consumption and investment are more consistent with the CEPD-defined chronologies than those defined by the univariate Markov-switching models, especially for the post-1990 period.

Long-run aggregate import demand function in Taiwan: an ARDL bounds testing approach

This article adopts the bounds test, developed by Pesaran et al. (2001), to determine whether there is a level long-run relationship exists between Taiwans real import demand function and it determinants, namely real domestic income and relative prices. It is found that aggregate import quantities and their determinants do indeed exhibit a level long-run relationship. In addition, the empirical results show that estimated short-run elasticity and long-run income elasticity are both elastic but that short-run income elasticity is considerably greater than that of its long-run counterpart. This indicates that economic growth should have a relatively greater negative impact on trade balance in the short-run than in the long-run.

Measuring business cycle turning points in Japan with the Markov Switching Panel model

This paper employs a Markov Switching Panel model to measure business cycle turning points in Japan. This Markov Switching Panel model is simple and can easily be estimated following Hamiltons [J.D. Hamilton, A new approach to the economic analysis of nonstationary time series and the business cycle, Econometrica 57 (1989) 357-384] method. We find that this model is highly capable of identifying Japanese recessionary dates, and it also has a forecast performance that is equal to that of the Markov Switching Vector Autoregressive model. The implication that emerges here is that governments, their agencies and other business leaders in Japan and elsewhere should also employ the Markov Switching Panel model to secure complementary data.

Long swing in appreciation and short swing in depreciation and does the market not know it?—the case of Taiwan

This paper finds an asymmetric swing in Taiwans exchange rate. In contrast to the developed countries, whose exchange rates exhibit long swings in both appreciation and depreciation regimes, the long swing only exists in an appreciation regime for Taiwan. A short swing, however, is found during a depreciation regime in Taiwan. These results may reflect to some extent the central banks preference, which is to have a let‐it‐go policy during depreciation and a slowdown policy in appreciation. In addition, it may simply reflect the Japanese yens influences.

Modelling Business Cycles in Taiwan with Time-Varying Markov-Switching Models

This paper employs Hamilton’s (1989) original Markov-switching model and the time-varying Markov-switching model developed by Filardo (1994), respectively, to investigate the business cycle and evaluate the usefulness of the coincident and leading indexes in dating the business cycle and in predicting future GDP in Taiwan. The empirical results suggest that these two indexes help date the business cycle in Taiwan and improve precision in predicting turning points. As for forecasting future GDP, the coincident index is useful whereas the leading index is not.

Simultaneously modeling the volatility of the growth rate of real GDP and determining business cycle turning points: Evidence from the U.S., Canada and the UK

This paper investigates the volatility of the rates of output growth for the U.S., Canada and the UK. We empirically characterize the volatility of the growth rate of real GDP and, at the same time, we hope we can successfully identify business cycle turning points. The empirical results show that there have been structural changes in the volatility of output growth for these countries. While the Markov Switching heteroscedasticity model can capture this feature very well for all three countries, the modified Markov Switching heteroscedasticity model introduced here not only performs extremely well in modeling the volatility behavior of the growth rate of real GDP, but, at the same time, it also successfully identifies business cycle peak and trough dates.

Is there a duration dependence in Taiwan's business cycles?

This paper intends to investigate the duration dependent feature of Taiwans business cycles. The constant Markov switching model is revised to take account of the duration dependent feature. The most innovative findings herein are that there is no duration dependence for contraction for the circa pre-1990 periods and no duration dependence for expansion for the circa post-1990 periods. However, there is duration dependence for economic expansion for the circa pre-1990 and duration dependence for contraction for circa post-1990 periods, respectively. In addition, the recessionary dates identified by the duration dependent Markov switching model are identical to the officially defined recessionary chronologies.

Nonlinear relationship between inflation and inflation uncertainty in Taiwan

Using Taiwan data, the study employs Hamiltons (2001) flexible regression model to investigate the relationship between inflation and inflation uncertainty. The results convincingly support Friedmans hypothesis that a rise in the inflation rate increases inflation uncertainty. This result, however, holds only in a positive inflation regime. When the inflation rate is in a negative inflation regime, one clearly notes that a drop in the inflation rate also increases inflation uncertainty. Thus Friedmans argument is complemented by advocating that a rise in the absolute inflation rate increases inflation uncertainty. Turning to Cukierman-Meltzers hypothesis, both linear and nonlinear inflation uncertainties affect the inflation rate, where the former has positive but the latter has negative effects.