IDEAS home Printed from https://ideas.repec.org/a/spt/admaec/v14y2024i3f14_3_7.html
   My bibliography  Save this article

The Influence of Defense Industry Development Act on the Smooth Transition Dynamics of Stock Volatilities of Defense Industry

Author

Listed:
  • Yi-Kai Su
  • Kae-Yih Tzeng
  • Chun-Jan Tseng
  • Cheng-Hsien Lin

Abstract

This study aims to investigate the impacts of the Defense Industry Development Act on the volatility of the defense industry as geopolitical risk is raised. Applying the smooth transition generalized autoregressive conditional heteroskedasticity (ST-GARCH) model for daily defense stocks, we demonstrate that the structure breaks in the volatility dynamics process of all defense stocks for Taiwan. The empirical findings show that most defense stocks started the adjustment process more than one year before the date of launch of Defense Industry Development Act except Magnate Technology Corporation (MTC) and China Ship Building Corporation Taiwan (CSBC). The model specification tests suggest two types of transition functions including U-shaped and Z-shaped for all defense stocks. The estimated parameters indicate that the volatilities of returns in defense stocks for Taiwan have inverted U-shaped and inverted Z-shaped patterns of structure breaks. The volatilities of defense enterprise stock return shift by the event of Defense Industry Development Act. Â JEL classification numbers: G00, G14, G18, L52.

Suggested Citation

  • Yi-Kai Su & Kae-Yih Tzeng & Chun-Jan Tseng & Cheng-Hsien Lin, 2024. "The Influence of Defense Industry Development Act on the Smooth Transition Dynamics of Stock Volatilities of Defense Industry," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 14(3), pages 1-7.
    • Handle: RePEc:spt:admaec:v:14:y:2024:i:3:f:14_3_7
    as

    Download full text from publisher

    File URL: http://www.scienpress.com/Upload/AMAE%2fVol%2014_3_7.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dario Caldara & Matteo Iacoviello, 2022. "Measuring Geopolitical Risk," American Economic Review, American Economic Association, vol. 112(4), pages 1194-1225, April.
    2. Yung-Shi Liau & Jack Yang, 2008. "The mean/volatility asymmetry in Asian stock markets," Applied Financial Economics, Taylor & Francis Journals, vol. 18(5), pages 411-419.
    3. Jr-Tsung Huang & An-Pang Kao, 2005. "Does defence spending matter to employment in Taiwan?," Defence and Peace Economics, Taylor & Francis Journals, vol. 16(2), pages 101-115.
    4. Ray Yeutien Chou & Chun-Chou Wu & Yi-Nung yang, 2012. "The euro's impacts on the smooth transition dynamics of stock market volatilities," Quantitative Finance, Taylor & Francis Journals, vol. 12(2), pages 169-179, May.
    5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    6. Chen, Cathy W.S. & Wang, Zona & Sriboonchitta, Songsak & Lee, Sangyeol, 2017. "Pair trading based on quantile forecasting of smooth transition GARCH models," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 38-55.
    7. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, vol. 62(2), pages 211-228, June.
    8. Li, Dongxin & Zhang, Li & Li, Lihong, 2023. "Forecasting stock volatility with economic policy uncertainty: A smooth transition GARCH-MIDAS model," International Review of Financial Analysis, Elsevier, vol. 88(C).
    9. Ross, Stephen A, 1989. " Information and Volatility: The No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy," Journal of Finance, American Finance Association, vol. 44(1), pages 1-17, March.
    10. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hsiang-Hsi Liu & Chun-Chou Wu & Yi Kai Su, 2012. "The influence of direct cross-straits shipping on the smooth transition dynamics of stock volatilities of shipping companies," Applied Financial Economics, Taylor & Francis Journals, vol. 22(16), pages 1331-1342, August.
    2. Day-Yang Liu & Chun-Ming Chen & Yi-Kai Su, 2020. "The Impact of COVID-19 Pandemic on the Smooth Transition Dynamics of Broad-based Indices Volatilities in Taiwan," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(5), pages 1-14.
    3. Day Yang Liu & Ming Chen Chun & Yi Kai Su, 2021. "The impacts of Covid-19 pandemic on the smooth transition dynamics of stock market index volatilities for the Four Asian Tigers and Japan," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 10(4), pages 183-194, June.
    4. Eleni Constantinou & Robert Georgiades & Avo Kazandjian & George Kouretas, 2005. "Mean and variance causality between the Cyprus Stock Exchange and major equity markets," Working Papers 0501, University of Crete, Department of Economics.
    5. Poshakwale, Sunil S. & Aquino, Katty Pérez, 2008. "The dynamics of volatility transmission and information flow between ADRs and their underlying stocks," Global Finance Journal, Elsevier, vol. 19(2), pages 187-201.
    6. Wan, Xiaoli & Yan, Yuruo & Zeng, Zhixiong, 2020. "Exchange rate regimes and market integration: evidence from the dynamic relations between renminbi onshore and offshore markets," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    7. Xiufeng Yan, 2021. "Autoregressive conditional duration modelling of high frequency data," Papers 2111.02300, arXiv.org.
    8. Cheung, Yin-Wong & Ng, Lilian K., 1996. "A causality-in-variance test and its application to financial market prices," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 33-48.
    9. Shogbuyi, Abiodun & Steeley, James M., 2017. "The effect of quantitative easing on the variance and covariance of the UK and US equity markets," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 281-291.
    10. Shi, Yujie & Wang, Liming & Ke, Jian, 2021. "Does the US-China trade war affect co-movements between US and Chinese stock markets?," Research in International Business and Finance, Elsevier, vol. 58(C).
    11. Yadav, Pradeep K., 1992. "Event studies based on volatility of returns and trading volume: A review," The British Accounting Review, Elsevier, vol. 24(2), pages 157-184.
    12. Tarek Bouazizi & Zouhaier Hadhek & Fatma Mrad & Mosbah Lafi, 2021. "Changes in Demand for Crude Oil and its Correlation with Crude Oil and Stock Market Returns Volatilities: Evidence from Three Asian Oil Importing Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 11(3), pages 27-43.
    13. Afees A. Salisu & Ahamuefula E. Ogbonna & Rangan Gupta & Elie Bouri, 2023. "Energy-Related Uncertainty and International Stock Market Volatility," Working Papers 202336, University of Pretoria, Department of Economics.
    14. Malik, Farooq & Ewing, Bradley T. & Kruse, Jamie B. & Lynch, Gerald J., 2009. "Modeling the time-varying volatility of the paper-bill spread," Journal of Economics and Business, Elsevier, vol. 61(5), pages 404-414, September.
    15. Das, Suman & Roy, Saikat Sinha, 2023. "Following the leaders? A study of co-movement and volatility spillover in BRICS currencies," Economic Systems, Elsevier, vol. 47(2).
    16. Amado, Cristina & Teräsvirta, Timo, 2013. "Modelling volatility by variance decomposition," Journal of Econometrics, Elsevier, vol. 175(2), pages 142-153.
    17. Park, Jinwoo, 2001. "Information flows between non-deliverable forward (NDF) and spot markets: Evidence from Korean currency," Pacific-Basin Finance Journal, Elsevier, vol. 9(4), pages 363-377, August.
    18. Jones, Charles M. & Lamont, Owen & Lumsdaine, Robin L., 1998. "Macroeconomic news and bond market volatility," Journal of Financial Economics, Elsevier, vol. 47(3), pages 315-337, March.
    19. Leung, Henry & Schiereck, Dirk & Schroeder, Florian, 2017. "Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises," Economic Modelling, Elsevier, vol. 61(C), pages 169-180.
    20. Yaya, OlaOluwa S. & Tumala, Mohammed M. & Udomboso, Christopher G., 2016. "Volatility persistence and returns spillovers between oil and gold prices: Analysis before and after the global financial crisis," Resources Policy, Elsevier, vol. 49(C), pages 273-281.

    More about this item

    Keywords

    Geopolitical; Defense industry; Volatility; Structure change; Defense Industry Development Act.;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spt:admaec:v:14:y:2024:i:3:f:14_3_7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Eleftherios Spyromitros-Xioufis (email available below). General contact details of provider: http://www.scienpress.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.