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Causality between Stock Volatility and Macroeconomic Volatilities in Taiwan

No.:EP0195

Author:Yen-pao Chen

Price:Out of print

Publication:1999.11

Abstract:

The purpose of this research is to examine the Granger-causal relationship between volatility in the index of Taiwan Stock Exchange and volatility of macroeconomic variables. The volatility series are estimates using the GARCH (Generalized Autoregressive Conditionally Heteroskedastic) model. Tests of Granger-causality are conducted by VAR (Vector Autoregressive) approach. It is found that volatility of exchange rate and volatility of consumer price index Granger-cause the stock voaltility with a feedback. The prediction power of these two volatility series on future stock volatility is stronger than other macroeconomic volatilities. The results also indicate that business cycles have an impact on the causal relations During periods of economic expansion, the number of macroeconomic volatilities which have causal effect on stock volatility increases. The prediction power on stock volatility rise during expansions as well. Finally, volatilities of different measurement of macroeconomic variables, for example, M1a, M1b and M2 as measures of money supply, have different implications in the interaction between stock market and economic sectors. (JEL E44 , G10) Keywords:stock volatility, economic volatility, GARCH, VAR
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