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Taiwan's financial holding companies: an empirical investigation based on Markov regime-switching model

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  • Chau-Jung Kuo
  • Su-Lien Lu
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    Abstract

    Though the Financial Holding Company Act in Taiwan permits banks, securities firms and insurance companies to affiliate, identifying the influence on Taiwan's financial holding companies hasn't been discussed rigorously yet. This paper presents a formal methodology, using two-state Markov regime switching approach, to allow for the uncertainty event-date of financial holding companies' stock return and risk. This study serves as one of the first studies that adopt a Markov regime-switching model to estimate financial holding companies' stock behaviour. The evidence shows that 12 of 13 financial holding companies have regime-switching and one has no regime-switching in Taiwan. Therefore, the stock behaviours of Taiwan's financial holding companies follow two regimes and the traditional linear model cannot be descriptive. However, the levels of 12 financial holding companies' risk are significantly low of state 1 and stock returns are indifferent between two states. Hence, there are diversification benefits of Taiwan's financial holding companies. Summarily, to assess the influence on Taiwan's financial holding companies, it is recognized that this methodology developed by the model is meaningful for research.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0003084042000323573
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 37 (2005)
    Issue (Month): 5 ()
    Pages: 593-605

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    Handle: RePEc:taf:applec:v:37:y:2005:i:5:p:593-605

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    1. Perron, Pierre & Campbell, John Y, 1993. "A Note on Johansen's Cointegration Procedure When Trends Are Present," Empirical Economics, Springer, vol. 18(4), pages 777-89.
    2. Christopher M. Turner & Richard Startz & Charles R. Nelson, 1989. "A Markov Model of Heteroskedasticity, Risk, and Learning in the Stock Market," NBER Working Papers 2818, National Bureau of Economic Research, Inc.
    3. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
    4. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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