Quality & Quantity

, Volume 43, Issue 2, pp 237–248 | Cite as

The political uncertainty and stock market behavior in emerging democracy: the case of Taiwan

  • Yi-Hsien Wang
  • Chin-Tsai Lin
Research Note


This paper examines the congressional effect between the pre- and post-democratization on the stock market by the asymmetric Generalized Autoregressive Conditional Heterosce desticity (GARCH) model in the period 1984–2004. The results found that the congressional effect is negative effect on stock returns but volatility is not significant. However, the democratic effect on stock returns is negative and increased of volatility. Moreover, the congressional effect on stock market returns following democratization significantly exceeds that before democratization, but have no significant effect for the volatility in the same circumstances. These results provide evidences consistent with the contention of liberalization (Hayek, Am. Econ. Rev. 35, 519–530, Individualism and Economic order, The university of Chicago press, Chicago, London, 1945, 1948; Popper, The open society and its Enemies, Princeton university, NJ, 1950).


Political uncertainty Congressional effect Democratization Volatility asymmetry 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. 1.
    Akaike, H.: Information theory and an extension of the maximum likelihood principle. In: Petrov, B.N., Csaki, F. (eds.) Second International Symposium on Information Theory. Akademiai Kiado, Budapest (1973)Google Scholar
  2. 2.
    Allivine F.D., O’Neil D.D. (1980). Stock market returns and the presidential election cycle. Financ. Anal. J. 36: 49–56 CrossRefGoogle Scholar
  3. 3.
    Bachman D. (1992). The effect of political risk on the forward exchange bias: the case of elections. J. Int. Money Finance 11: 208–219 CrossRefGoogle Scholar
  4. 4.
    Baillie R.T., DeGennaro R.P. (1990). Stock Returns and Volatility. J. Financ. Quant Anal 25: 203–214 CrossRefGoogle Scholar
  5. 5.
    Berndt E., Hall B., Hall R., Hausman J. (1974). Estimation and inference in nonlinear structural models. Ann. Econ. Soc. Meas 4: 653–665 Google Scholar
  6. 6.
    Bittlingmayer G. (1998). Output, stock volatility and political uncertainty in a natural experiment: Germany, 1880–1940. J. Finance 53: 2243–2258 CrossRefGoogle Scholar
  7. 7.
    Bollerslev T. (1986). Generalized autoregressive conditional heteroskedasticity. J. Econom 31: 307–327 CrossRefGoogle Scholar
  8. 8.
    Bollerslev T. (1987). A conditional heter-oskedastic time series model for speculative price and rates of return. Rev. Econ. Stat 69: 542–547 CrossRefGoogle Scholar
  9. 9.
    Bratsiotis G.J. (2000). Political parties and inflation in Greece: the metamorphosis of the socialist party on the way to EMU. Applied Economics Letters 7: 451–454 CrossRefGoogle Scholar
  10. 10.
    Brown K.C., Harlow W.V., Tinic S.M. (1988). Risk aversion, uncertain information, and market efficiency. J. Financ. Econ 22: 355–385 CrossRefGoogle Scholar
  11. 11.
    Chan Y., Wei J. (1996). Political risk and stock price volatility: the case of Hong Kong. Pac. Basin Finance J. 4: 259–275 CrossRefGoogle Scholar
  12. 12.
    Cover J.P., VanHoose D.D. (2000). Political pressure and the choice of the optimal monetary policy instrument. J. Econ. Bus. 52: 325–341 CrossRefGoogle Scholar
  13. 13.
    Engle R.F. (1982). Autoregressive conditional heteroskedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50: 987–1007 CrossRefGoogle Scholar
  14. 14.
    Foerster S.R. (1994). Stockmarket performance and elecions: Made-in-Canada effects?. Can. Invest. Rev. 7: 39–42 Google Scholar
  15. 15.
    Foerster S.R., Schmitz J.J. (1997). The transmission of US election cycles to international stock returns. J. Int. Bus. Stud. 28: 1–27 CrossRefGoogle Scholar
  16. 16.
    Frey B., Schneider F. (1978). An empirical study of politico–economic interaction in the United States. Rev. Econ. Stat 60: 174–183 CrossRefGoogle Scholar
  17. 17.
    Friedmann R., Sanddorf-Köhle W.G. (2002). Volatility clustering and nontrading days in Chinese stock markets. J. Econ. Bus. 54: 193–217 CrossRefGoogle Scholar
  18. 18.
    Gemmill G. (1992). Political risk and market efficiency: tested based in British stock and option markets in the 1987 election. J. Bank. Finance 16: 211–231 CrossRefGoogle Scholar
  19. 19.
    Glosten L.R., Jagannathan R., Runkle D. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. J. Finance 48: 1779–1801 CrossRefGoogle Scholar
  20. 20.
    Gwilym O.A., Buckle M. (1994). The efficiency of stock and options market: tests based on 1992 UK election polls. Appl. Financ. Econ. 4: 345–354 CrossRefGoogle Scholar
  21. 21.
    Hayek and F.A. (1945). The use of knowledge in society. Am. Econ. Rev. 35: 519–530 Google Scholar
  22. 22.
    Hayek F.A. (1948). Individualism and Economic Order. The University of Chicago Press, Chicago, London Google Scholar
  23. 23.
    Hentschel L. (1995). All in the family nesting symmetric and asymmetric GARCH models. J. Finan. Econ. 39: 71–104 Google Scholar
  24. 24.
    Huang R.D. (1985). Common stock returns and presidential elections. Financ. Anal. J. 41: 58–61 CrossRefGoogle Scholar
  25. 25.
    Kim H.Y., Mei J.P. (2001). What makes the stock market jump? An analysis of political risk on Hong Kong stock returns. J. Int. Money Finance 20: 1003–1016 CrossRefGoogle Scholar
  26. 26.
    Lamb R.P., Ma K.C., Pace R.D., Kennedy W.F. (1997). The congressional calendar and stock market performance. Financ. Serv. Rev. 6: 19–25 CrossRefGoogle Scholar
  27. 27.
    Lamoureux C.G., Lastrapes W.D. (1990). Heteroscedasticity in the stock return data: volume versus GARCH effects. J. Finance 45: 221–229 CrossRefGoogle Scholar
  28. 28.
    Lin C.T., Wang Y.H. (2004). Effects of the Legislative Sessions on the Stock Market: Evidence from Taiwan. Indian J. Econ. 85: 1–16 Google Scholar
  29. 29.
    Lobo B.J. (1999). Jump risk in the U.S. stock market: Evidence using political information. Rev. Finan. Econom. 8: 149–163 CrossRefGoogle Scholar
  30. 30.
    MacKinnon J.G. (1991). Critical Value for Cointegration Tests in Advanced Texts in Econometrics. Oxford, Oxford University Press Google Scholar
  31. 31.
    Michelson S. (1993). Using congressional sessions to predict the stock market. J. Bus. Econ. Perspect. 9: 89–99 Google Scholar
  32. 32.
    Nelson D. (1991). Conditional heteroskedasticity in asset returns: a new approach. Econometria 59: 347–370 CrossRefGoogle Scholar
  33. 33.
    Niederhofer V., Gibbs S., Bullock J. (1970). Presidential elections and the stock market. Financ. Anal. J. 26: 111–113 CrossRefGoogle Scholar
  34. 34.
    Nordhaus W.D. (1975). The political business cycle. Rev. of Econ. Stud. 42: 169–190 CrossRefGoogle Scholar
  35. 35.
    Pantzalis C., Stangeland D.A., Turtle H.J. (2000). Political elections and the resolution of uncertainty: the international evidence. J. Bank. Finance 24: 1575–1604 CrossRefGoogle Scholar
  36. 36.
    Perotti E.C., Oijen P.V. (2001). Privatization, political risk and stock market development in emerging economies. J. Int. Money Finance 20: 43–69 CrossRefGoogle Scholar
  37. 37.
    Popper K. (1950). The Open Society and Its Enemies. Princeton University, NJ Google Scholar
  38. 38.
    Lukseitch W.A., Reilly W.B. (1980). The market prefers republicans: myth or reality?. J. Financ. Quant. Anal. 15: 541–559 CrossRefGoogle Scholar
  39. 39.
    Santa-Clara P., Valkanov R. (2003). The presidential puzzle: political cycles and the stock market. J. Finance 58: 1841–1872 CrossRefGoogle Scholar
  40. 40.
    Schwarz G.W. (1978). Estimating the dimension of a model. Ann. Stat. 6: 461–464 CrossRefGoogle Scholar
  41. 41.
    Soh B.H. (1986). Political business cycles in industrialized democratic countries. Kyklos 39: 31–46 CrossRefGoogle Scholar
  42. 42.
    Stoken D. (1994). Strategic Investment Timing. Probus Publishing, Chicago Google Scholar
  43. 43.
    Tufte E. (1978). Political Control of the Economy. Princeton University Press, NJ Google Scholar
  44. 44.
    Willard K., Guinnane T., Rosen H. (1996). Turning points in the civil war: views from the greenback market. Am. Econ. Rev. 86: 1001–18 Google Scholar
  45. 45.
    Yeh Y., Lee T. (2000). The interaction and volatility asymmetry of unexpected returns in the greater china stock markets. Glob. Finance J. 11: 129–149 CrossRefGoogle Scholar

Copyright information

© Springer Science + Business Media B.V. 2007

Authors and Affiliations

  1. 1.Department of FinanceYuanpei UniversityHsinchuTaiwan
  2. 2.Graduate Institute of Business ManagementYuanpei UniversityHsinchuTaiwan

Personalised recommendations