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On the Effect of Stock Stabilization Fund: A Case of Taiwan

Author

Listed:
  • Yu-Jane Liu

    (Department of Finance, National Chengchi University, Taiwan, R.O.C)

  • Chih-Hsien Yu

    (Department of Finance, National Chung-Cheng University, Taiwan, R.O.C)

Abstract

The purpose of this paper is to investigate the effect of Taiwan's stock stabilization fund on the stock market. Stabilization funds have long been used by many countries to achieve the goal of market stabilization. However, the actual impacts of the funds still remain a puzzle. This is the first paper that empirically examines the effect of the stabilization fund on the stock market. Taiwan's stock stabilization fund, which was inaugurated in February 1996 after the panic selling induced by the announcement of military exercise by mainland China, provides an experimental environment for investigating whether this alternative mechanism is effective in stabilizing the stock price when the market is in panic. By intervention analysis, we find that in the short run, the stabilization fund is statistically significant in preventing the market price from further declining after the announcement of the mainland China's military exercise. This evidence still holds after controlling the effects of the following two events: Morgan-Stanley's announcement to include Taiwan stock index into its worldwide equity market indices, and the event of U.S. aircraft carrier sent to Taiwan Strait to secure this area during the period of military exercise by mainland China.

Suggested Citation

  • Yu-Jane Liu & Chih-Hsien Yu, 2002. "On the Effect of Stock Stabilization Fund: A Case of Taiwan," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 93-109.
    • Handle: RePEc:wsi:rpbfmp:v:05:y:2002:i:01:n:s0219091502000687
    DOI: 10.1142/S0219091502000687
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    Cited by:

    1. Ding, Cherng G. & Wang, Hung-Jui & Lee, Meng-Che & Hung, Wen-Chi & Jane, Ten-Der, 2021. "Assessing the reversal of investor sentiment," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    2. Nguyen, Tien-Trung & Wu, Yang-Che & Ke, Mei-Chu & Liao, Tung Liang, 2022. "Can direct government intervention save the stock market?," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 271-284.
    3. Li, Hui & Liu, Kerry, 2024. "China's National Team: A Game Changer in Stock Market Stabilization?," Finance Research Letters, Elsevier, vol. 61(C).
    4. Abbas Valadkhani, 2005. "Goods and Services Tax Effects on Goods and Services Included in the Consumer Price Index Basket," The Economic Record, The Economic Society of Australia, vol. 81(s1), pages 104-114, August.
    5. Zhu, Minchen & Lv, Dayong & Wu, Wenfeng, 2022. "Market stabilization fund and stock price crash risk: Evidence from the post-crash period," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    6. Andrew Worthington & Abbas Valadkhani, 2004. "Measuring the impact of natural disasters on capital markets: an empirical application using intervention analysis," Applied Economics, Taylor & Francis Journals, vol. 36(19), pages 2177-2186.
    7. Wu, Xu & Wang, Pei-Yu & Wang, Kun, 2023. "The effect of stabilization fund to rescue stock market based on expected return-capita circulation equation," Socio-Economic Planning Sciences, Elsevier, vol. 87(PB).
    8. Chi, Yeguang & Li, Xiaoming, 2019. "Beauties of the emperor: An investigation of a Chinese government bailout," Journal of Financial Markets, Elsevier, vol. 44(C), pages 42-70.

    More about this item

    Keywords

    Stock stabilization fund; Mainland China's military exercise; Morgan-Stanley event; ARIMA models; Intervention analysis; Outlier adjustment;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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