Skip to main content
Log in

The political uncertainty and stock market behavior in emerging democracy: the case of Taiwan

  • Research Note
  • Published:
Quality & Quantity Aims and scope Submit manuscript

Abstract

This paper examines the congressional effect between the pre- and post-democratization on the stock market by the asymmetric Generalized Autoregressive Conditional Heterosce desticity (GARCH) model in the period 1984–2004. The results found that the congressional effect is negative effect on stock returns but volatility is not significant. However, the democratic effect on stock returns is negative and increased of volatility. Moreover, the congressional effect on stock market returns following democratization significantly exceeds that before democratization, but have no significant effect for the volatility in the same circumstances. These results provide evidences consistent with the contention of liberalization (Hayek, Am. Econ. Rev. 35, 519–530, Individualism and Economic order, The university of Chicago press, Chicago, London, 1945, 1948; Popper, The open society and its Enemies, Princeton university, NJ, 1950).

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. Akaike, H.: Information theory and an extension of the maximum likelihood principle. In: Petrov, B.N., Csaki, F. (eds.) Second International Symposium on Information Theory. Akademiai Kiado, Budapest (1973)

  2. Allivine F.D., O’Neil D.D. (1980). Stock market returns and the presidential election cycle. Financ. Anal. J. 36: 49–56

    Article  Google Scholar 

  3. Bachman D. (1992). The effect of political risk on the forward exchange bias: the case of elections. J. Int. Money Finance 11: 208–219

    Article  Google Scholar 

  4. Baillie R.T., DeGennaro R.P. (1990). Stock Returns and Volatility. J. Financ. Quant Anal 25: 203–214

    Article  Google Scholar 

  5. Berndt E., Hall B., Hall R., Hausman J. (1974). Estimation and inference in nonlinear structural models. Ann. Econ. Soc. Meas 4: 653–665

    Google Scholar 

  6. Bittlingmayer G. (1998). Output, stock volatility and political uncertainty in a natural experiment: Germany, 1880–1940. J. Finance 53: 2243–2258

    Article  Google Scholar 

  7. Bollerslev T. (1986). Generalized autoregressive conditional heteroskedasticity. J. Econom 31: 307–327

    Article  Google Scholar 

  8. Bollerslev T. (1987). A conditional heter-oskedastic time series model for speculative price and rates of return. Rev. Econ. Stat 69: 542–547

    Article  Google Scholar 

  9. Bratsiotis G.J. (2000). Political parties and inflation in Greece: the metamorphosis of the socialist party on the way to EMU. Applied Economics Letters 7: 451–454

    Article  Google Scholar 

  10. Brown K.C., Harlow W.V., Tinic S.M. (1988). Risk aversion, uncertain information, and market efficiency. J. Financ. Econ 22: 355–385

    Article  Google Scholar 

  11. Chan Y., Wei J. (1996). Political risk and stock price volatility: the case of Hong Kong. Pac. Basin Finance J. 4: 259–275

    Article  Google Scholar 

  12. Cover J.P., VanHoose D.D. (2000). Political pressure and the choice of the optimal monetary policy instrument. J. Econ. Bus. 52: 325–341

    Article  Google Scholar 

  13. Engle R.F. (1982). Autoregressive conditional heteroskedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50: 987–1007

    Article  Google Scholar 

  14. Foerster S.R. (1994). Stockmarket performance and elecions: Made-in-Canada effects?. Can. Invest. Rev. 7: 39–42

    Google Scholar 

  15. Foerster S.R., Schmitz J.J. (1997). The transmission of US election cycles to international stock returns. J. Int. Bus. Stud. 28: 1–27

    Article  Google Scholar 

  16. Frey B., Schneider F. (1978). An empirical study of politico–economic interaction in the United States. Rev. Econ. Stat 60: 174–183

    Article  Google Scholar 

  17. Friedmann R., Sanddorf-Köhle W.G. (2002). Volatility clustering and nontrading days in Chinese stock markets. J. Econ. Bus. 54: 193–217

    Article  Google Scholar 

  18. Gemmill G. (1992). Political risk and market efficiency: tested based in British stock and option markets in the 1987 election. J. Bank. Finance 16: 211–231

    Article  Google Scholar 

  19. Glosten L.R., Jagannathan R., Runkle D. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. J. Finance 48: 1779–1801

    Article  Google Scholar 

  20. Gwilym O.A., Buckle M. (1994). The efficiency of stock and options market: tests based on 1992 UK election polls. Appl. Financ. Econ. 4: 345–354

    Article  Google Scholar 

  21. Hayek and F.A. (1945). The use of knowledge in society. Am. Econ. Rev. 35: 519–530

    Google Scholar 

  22. Hayek F.A. (1948). Individualism and Economic Order. The University of Chicago Press, Chicago, London

    Google Scholar 

  23. Hentschel L. (1995). All in the family nesting symmetric and asymmetric GARCH models. J. Finan. Econ. 39: 71–104

    Google Scholar 

  24. Huang R.D. (1985). Common stock returns and presidential elections. Financ. Anal. J. 41: 58–61

    Article  Google Scholar 

  25. Kim H.Y., Mei J.P. (2001). What makes the stock market jump? An analysis of political risk on Hong Kong stock returns. J. Int. Money Finance 20: 1003–1016

    Article  Google Scholar 

  26. Lamb R.P., Ma K.C., Pace R.D., Kennedy W.F. (1997). The congressional calendar and stock market performance. Financ. Serv. Rev. 6: 19–25

    Article  Google Scholar 

  27. Lamoureux C.G., Lastrapes W.D. (1990). Heteroscedasticity in the stock return data: volume versus GARCH effects. J. Finance 45: 221–229

    Article  Google Scholar 

  28. Lin C.T., Wang Y.H. (2004). Effects of the Legislative Sessions on the Stock Market: Evidence from Taiwan. Indian J. Econ. 85: 1–16

    Google Scholar 

  29. Lobo B.J. (1999). Jump risk in the U.S. stock market: Evidence using political information. Rev. Finan. Econom. 8: 149–163

    Article  Google Scholar 

  30. MacKinnon J.G. (1991). Critical Value for Cointegration Tests in Advanced Texts in Econometrics. Oxford, Oxford University Press

    Google Scholar 

  31. Michelson S. (1993). Using congressional sessions to predict the stock market. J. Bus. Econ. Perspect. 9: 89–99

    Google Scholar 

  32. Nelson D. (1991). Conditional heteroskedasticity in asset returns: a new approach. Econometria 59: 347–370

    Article  Google Scholar 

  33. Niederhofer V., Gibbs S., Bullock J. (1970). Presidential elections and the stock market. Financ. Anal. J. 26: 111–113

    Article  Google Scholar 

  34. Nordhaus W.D. (1975). The political business cycle. Rev. of Econ. Stud. 42: 169–190

    Article  Google Scholar 

  35. Pantzalis C., Stangeland D.A., Turtle H.J. (2000). Political elections and the resolution of uncertainty: the international evidence. J. Bank. Finance 24: 1575–1604

    Article  Google Scholar 

  36. Perotti E.C., Oijen P.V. (2001). Privatization, political risk and stock market development in emerging economies. J. Int. Money Finance 20: 43–69

    Article  Google Scholar 

  37. Popper K. (1950). The Open Society and Its Enemies. Princeton University, NJ

    Google Scholar 

  38. Lukseitch W.A., Reilly W.B. (1980). The market prefers republicans: myth or reality?. J. Financ. Quant. Anal. 15: 541–559

    Article  Google Scholar 

  39. Santa-Clara P., Valkanov R. (2003). The presidential puzzle: political cycles and the stock market. J. Finance 58: 1841–1872

    Article  Google Scholar 

  40. Schwarz G.W. (1978). Estimating the dimension of a model. Ann. Stat. 6: 461–464

    Article  Google Scholar 

  41. Soh B.H. (1986). Political business cycles in industrialized democratic countries. Kyklos 39: 31–46

    Article  Google Scholar 

  42. Stoken D. (1994). Strategic Investment Timing. Probus Publishing, Chicago

    Google Scholar 

  43. Tufte E. (1978). Political Control of the Economy. Princeton University Press, NJ

    Google Scholar 

  44. Willard K., Guinnane T., Rosen H. (1996). Turning points in the civil war: views from the greenback market. Am. Econ. Rev. 86: 1001–18

    Google Scholar 

  45. Yeh Y., Lee T. (2000). The interaction and volatility asymmetry of unexpected returns in the greater china stock markets. Glob. Finance J. 11: 129–149

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Chin-Tsai Lin.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Wang, YH., Lin, CT. The political uncertainty and stock market behavior in emerging democracy: the case of Taiwan. Qual Quant 43, 237–248 (2009). https://doi.org/10.1007/s11135-007-9102-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11135-007-9102-6

Keywords

Navigation