Mean-reverting and Asymmetric Volatility Switching Properties of Stock Price Index, Exchange Rate and Foreign Capital in Taiwan*

The main purpose of the present study is to explore the relationships among stock price index, exchange rate and foreign capital in Taiwan and to detect whether the mean-reverting and asymmetric volatility switching properties exist in these markets. The multivariate asymmetric nonlinear smooth transition generalized autoregressive conditional heteroskedastic in mean model is used in this study. The empirical results indicate that overbuy and oversell rates of foreign capital influence the movements of the stock price index and the exchange rate. All three conditional means exhibit asymmetric mean-reverting behavior, with negative returns reverting quicker than positive returns in terms of both speed and magnitude. The empirical results also demonstrate that the conditional heteroskedasticities of these markets are asymmetric, generating different volatility persistence under a prior positive and negative return shock.