Political Shocks and Abnormal Returns During the Taiwan Crisis: An Event Study Analysis
Abstract
The size and significance of a political shock's impact on financial markets is seldom fully understood. Often the effects of a shock are underestimated, affecting markets more significantly than expected. Likewise, these event's impacts can be overestimated, a phenomenon perhaps perpetuated by the media, which may cause people to view a political shock as more severe than it might be otherwise. Focusing on the 1996 Taiwan Crisis, by means of event study analysis, this paper attempts to determine the extent to which this political shock affected the Taiwanese, and surrounding Japanese stock markets. Using standard OLS and GARCH modeling techniques, this paper finds little support that the Taiwan Crisis strongly affected the Taiwanese markets, or caused contagion effects in Japanese markets. This result is contrary to the media's portrayal that the Taiwan Crisis caused abnormal returns and excess volatility in the regions examined. The results have economic and political implications. One implication brings to question the validity of the media's assertion that this conflict disrupted financial markets. Another implication suggests that citizens in the region trust the safeguards in place to prevent conflict. Furthermore, the modeling and methodology used in this paper could be applied to examine how political shocks may affect other financial markets.
Document Details
- Document Type
- Technical Report
- Publication Date
- Aug 15, 2002
- Accession Number
- ADA406675
Entities
People
- Geoffrey M. Steeves
Organizations
- University of Colorado Boulder