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Nonlinear Dynamics Between the Investor Fear Gauge and Market Index in the Emerging Taiwan Equity Market

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  • Yang-Cheng Lu
  • Yu-Chen Wei
  • Chien-Wei Chang

Abstract

Nonlinear models that include the threshold autoregressive model and the threshold cointegration model (TVECM) are applied from the behavioral finance point of view to examine the dynamics between the investor fear gauge proxied by the volatility index ( TVIX ) and the market index ( TAIEX ) in Taiwan. If the TVIX is in the extreme higher regime identified by the TAR, the overreaction of the investors' fear gauge could be the leading indicator of the market. However, in the extreme lower regime identified by the TVECM, the TAIEX returns would drive the deviation between the indexes to convergence.

Suggested Citation

  • Yang-Cheng Lu & Yu-Chen Wei & Chien-Wei Chang, 2012. "Nonlinear Dynamics Between the Investor Fear Gauge and Market Index in the Emerging Taiwan Equity Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 171-191, January.
    • Handle: RePEc:mes:emfitr:v:48:y:2012:i:0:p:171-191
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    Cited by:

    1. Jaeram Lee & Doojin Ryu, 2016. "Asymmetric Mispricing and Regime-dependent Dynamics in Futures and Options Markets," Asian Economic Journal, East Asian Economic Association, vol. 30(1), pages 47-65, March.
    2. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.

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