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GARCH, jumps and permanent and transitory components of volatility: the case of the Taiwan exchange rate

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  • Chen, Shyh-Wei
  • Shen, Chung-Hua

Abstract

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 Taiwan’s exchange rate.

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  • Chen, Shyh-Wei & Shen, Chung-Hua, 2004. "GARCH, jumps and permanent and transitory components of volatility: the case of the Taiwan exchange rate," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 67(3), pages 201-216.
    • Handle: RePEc:eee:matcom:v:67:y:2004:i:3:p:201-216
    DOI: 10.1016/j.matcom.2004.06.006
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    2. Chang, Kuang-Liang, 2012. "The time-varying and asymmetric dependence between crude oil spot and futures markets: Evidence from the Mixture copula-based ARJI–GARCH model," Economic Modelling, Elsevier, vol. 29(6), pages 2298-2309.
    3. Guo, Yanfeng & Wen, Xiaoqian & Wu, Yanrui & Guo, Xiumei, 2016. "How is China's coke price related with the world oil price? The role of extreme movements," Economic Modelling, Elsevier, vol. 58(C), pages 22-33.
    4. Lee, Yen-Hsien & Hu, Hsu-Ning & Chiou, Jer-Shiou, 2010. "Jump dynamics with structural breaks for crude oil prices," Energy Economics, Elsevier, vol. 32(2), pages 343-350, March.
    5. Angela Ifeanyi Ukemenam & Babatunde Opadeji & Tuwe Soro Garbobiya & Augustine Ujunwa, 2018. "Macroeconomic Effects of Exogenous Oil Price Shock in Nigeria: Persistent or Transitory," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(11), pages 1-28, November.

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    More about this item

    Keywords

    Component model in volatiltiy; GARCH; Jump;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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