Taiwan Stock Market Liquidity and the Business Cycle
Date Issued
2012
Date
2012
Author(s)
Shih, Meng-Chih
Abstract
Since the financial crisis, it becomes an important topic to predict the GDP growth rate in a country. Generally speaking, the stock market is always a leading indicator. After extracting the information we need from the stock market, we can use it to calculate an easy index to predict the business cycle. Therefore, we are able to adopt remedial measures preventing the recession.
Taiwan stock market is constituted by individual investors most. This is different from the developed countries. As a result, the stock index volatility in Taiwan is very intense. It is an interesting topic that whether we can use the same indicator to predict the business cycle or not. We use the VAR model and seasonal data to measure the GDP growth rate by the stock market liquidity and other variables after the QFIIs allowed to enter Taiwan stock market.
In this thesis, the Amihud liquidity indicator is robust to the GDP growth rate. The adjusted debit balance finance which is used to measure individual investors’ activities is robust as well. This result disobliges the traditional concept. We found that individual investors have predicting ability about the future macroeconomic situation. We also found that the credit spread from five largest banks is robust to the GDP growth rate. If the spread is getting bigger, it means that we should be optimistic to the GDP growth rate next period.
Subjects
Stock market
Liquidity
Business cycle
Unit root test
VAR model
Granger causality test
Type
thesis
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