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Capital liquidity and abnormal returns in the Taiwan stock market: The impact of the US-China trade conflict and the COVID-19 pandemic

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  • W.D. Chen

Abstract

Liquidity plays a crucial role in the risks associated with capital flows. This study points out that, in addition to transaction costs that may hinder liquidity, increased external risk can also contribute to a reduction in liquidity. A slowdown in liquidity can lead to abnormal returns in the stock market, resulting in sharp increases or decreases. The research investigates the relationship between liquidity of capital flows and abnormal returns within the Taiwan stock market, with particular emphasis on the periods preceding and following the US-China trade conflict and the COVID-19 pandemic. The results reveal that both events exerted a considerable influence on the risk dynamics within Taiwan’s stock market. Specifically, during the US-China trade war, there was a notable increase in capital liquidity in Taiwan’s stock market. Conversely, the period of the COVID-19 pandemic was characterized by a decrease in liquidity. Additionally, our analysis indicates that illiquidity significantly impacts abnormal returns.

Suggested Citation

  • W.D. Chen, 2026. "Capital liquidity and abnormal returns in the Taiwan stock market: The impact of the US-China trade conflict and the COVID-19 pandemic," Applied Economics, Taylor & Francis Journals, vol. 58(1), pages 69-82, January.
    • Handle: RePEc:taf:applec:v:58:y:2026:i:1:p:69-82
    DOI: 10.1080/00036846.2024.2448613
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