The threshold effect of the Taiwan stock market on ETF under the monetary policy
Abstract
Taiwan’s central bank produces tightening or easing effects by controlling the rediscount rate, which indirectly affects the stock market. An exchange-traded fund (ETF) is a fund that tracks the stock market index. ETF’s effect on trading involves not only the trading volume brought by ETF trading but also the various ETF trading strategies and the basket trading required by ETF, which makes the trading of other stocks more active. We examine whether there is a threshold effect of Taiwan’s stock market on ETF under monetary policy. The explanatory variable is the price return rate of the stock market’s weighted index; the response variable is the ETF price return rate. The rediscount rate is used as a transition variable. We analyze daily data from September 28, 2011 to September 28, 2020 using a smooth-transition autoregressive model with exogenous variables (STARX). The results reveal a threshold effect between stock market of Taiwan and ETF.
First published online 18 November 2024
Keyword : STARX, monetary policy, stock market, ETF, threshold effect
How to Cite
Yang, T.-Y. (2024). The threshold effect of the Taiwan stock market on ETF under the monetary policy. Technological and Economic Development of Economy, 1-17. https://doi.org/10.3846/tede.2024.22339
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Teräsvirta, T., & Anderson, H. M. (1992). Characterizing nonlinearities in business cycles using smooth transition autoregressive models. Journal of Applied Econometrics, 7(S1), S119–S136. https://doi.org/10.1002/jae.3950070509
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Wang, Y. (2023). Long-run effects of monetary policy of China on its economic growth. The Chinese Economy, 56(6), 431–440. https://doi.org/10.1080/10971475.2023.2200662
Wu, P. C., & Lee, C. C. (2014). The threshold effect of Central Bank’s intervention on the nexus of trade balance and macroeconomic determinants. The Empirical Economics Letters, 13, 763–772.
Wu, P. S., Cheng, W. S., Chiu, C. L., & Chiu, T. H. (2002). The analysis of permanent and temporary correlation among monetary policy, exchange market and stock market. Commerce & Management Quarterly, 3(2), 161–177.
Yang, L. T. Y. (2020). The influence of Taiwan’s stock market on Bitcoin’s price under Taiwan’s monetary policy threshold. Applied Economics, 52(45), 4967–4975. https://doi.org/10.1080/00036846.2020.1751802
Yang, T. Z., Hung, P. V., Chang, C.-J., & Nguyen, N. P. (2021). The influences of stock market on exchange-traded fund under the threshold effect of monetary policy in China. The Singapore Economic Review. https://doi.org/10.1142/S021759082150079X
Yu, F. M. (2018). A study of relationship among Taiwan 50 ETFS, Taiwan 50 securities and market momentum [Master thesis, National Cheng Kung University].
Bissoon, R., Seetanah, B., Bhattu-Babajee, R., Gopy-Ramdhany, N., & Seetah, K. (2016). Monetary policy impact on stock return: Evidence from growing stock markets. Theoretical Economics Letters, 6(5), 1186–1195. https://doi.org/10.4236/tel.2016.65112
Ben-David, I., Franzoni, F., & Moussawi, R. (2018). Do ETFs increase volatility? Journal of Finance, 73(6), 2471–2535. https://doi.org/10.1111/jofi.12727
Chan, K. S., & Tong, H. (1986). On estimating thresholds in autoregressive models. Journal of Time Series Analysis, 7(3), 179–190. https://doi.org/10.1111/j.1467-9892.1986.tb00501.x
Chang, C. H., Hsu, C. T., Liu, Y. C., & Wu, T. M. (2016). Economic theory and practice. Hwa Tai Publishing.
De Rossi, G., & Steliaros, M. (2022). The shift from active to passive and its effect on intraday stock dynamics. Journal of Banking & Finance, 143, Article 106595. https://doi.org/10.1016/j.jbankfin.2022.106595
ETFGI. (2020). ETFGI reports that assets in ETFs/ETPs listed globally are again over the 6 trillion US Dollar milestone at the end of May 2020. https://etfgi.com/news/press-releases/2020/06/etfgi-reports-assets-etfsetps-listed-globally-are-again-over-6-trillion
Fernández-Amador, O., Gächter, M., Larch, M., & Peter, G. (2013). Does monetary policy determine stock market liquidity? New evidence from the euro zone. Journal of Empirical Finance, 21, 54–68. https://doi.org/10.1016/j.jempfin.2012.12.008
Fu, C., Huang, Q., & Tang, H. (2022). Do ETFs affect ADRs and U.S. domestic stocks differently? Journal of International Financial Markets, Institutions and Money, 80, Article 101643, 2–18. https://doi.org/10.1016/j.intfin.2022.101643
Glosten, L., Nallareddy, S., & Zou, Y. (2021). ETF activity and informational efficiency of underlying securities. Management Science, 67(1), 22–47. https://doi.org/10.1287/mnsc.2019.3427
Goyenko, R. Y., & Ukhov, A. D. (2009). Stock and bond market liquidity: A long-run empirical analysis. Journal of Financial and Quantitative Analysis, 44(1), 189–212. https://doi.org/10.1017/S0022109009090097
Hamm, S. J. W. (2014). The effect of ETFs on stock liquidity. SSRN. https://doi.org/10.2139/ssrn.1687914
Huang, S., O’Hara, M., & Zhong, Z. (2021). Innovation and informed trading: Evidence from industry ETFs. The Review of Financial Studies, 34(3), 1280–1316. https://doi.org/10.1093/rfs/hhaa077
Hung, K. C. (2017). Essays on the effects of expectations-based monetary policy on stock markets: Origins and implications [Master thesis, National Sun Yat-sen University].
Hong, H., Kubik, J. D., & Fishman, T. (2012). Do arbitrageurs amplify economic shocks? Journal of Financial Economics, 103(3), 454–470. https://doi.org/10.1016/j.jfineco.2011.10.007
Karmazienė, E., & Sokolovski, V. (2022). Short-selling equity exchange traded funds and its effect on stock market liquidity. Journal of Financial & Quantitative Analysis, 57(3), 923–956. https://doi.org/10.1017/S0022109021000181
Krugman, P. R., & Obstfeld, M. (2004). International economics: Theory and policy (7th ed.). Addison Wesley.
Lin, S. Y. (2014). The relationship among the change of interest rates, stock markets and bond markets before and after the implementation of quantitative easing (QE) monetary policy [Master thesis, Ming Chuan University].
Liu, Y. S. (2021). The impact of trading information sets on exchange rate change and volatility: Evidence from Taiwan. SAGE Open, 11(4). https://doi.org/10.1177/21582440211052947
Lou, D., & Polk, C. (2013). Comomentum: Inferring arbitrage activity from return correlations (Paul Wooley Centre Working Paper No. 36, Financial Markets Group Discussion Paper No. 721).
McMillan, D. G. (2011). Nonlinear predictability of stock market returns: Evidence from nonparametric and threshold models. International Review of Economics & Finance, 10(4), 353–368. https://doi.org/10.1016/S1059-0560(01)00093-4
Miao, Y. Y. (2002). The analysis of the relation between monetary policy and stock returns in the Asian and Oceanian region – The example of the vector autoregression and co-integration model [Master thesis, Chung Yuan Christian University].
Naik, P., & Reddy, Y. V. (2021). Stock market liquidity: A literature review. SAGE Open, 11(1). https://doi.org/10.1177/2158244020985529
Nie, H., Jiang Y., & Yang, B. (2018). Do different time horizons in the volatility of the US stock market significantly affect the China ETF market? Applied Economics Letters, 25(11), 747–751. https://doi.org/10.1080/13504851.2017.1363853
Pan, S. C., Huang, Y. S., & Wu, P. C. (2011). The estimation of cash flow at risk. Journal of Management & Systems, 18(1), 35–70.
Putniņš, T. J. (2022). Free markets to fed markets: How modern monetary policy impacts equity markets. Financialy Analysts Journal, 78(2), 35–56. https://doi.org/10.1080/0015198X.2022.2029081
Sarno, L., Taylor, M. P., & Peel, D. A. (2003). Nonlinear equilibrium correction in U.S. real money balances, 1869–1997. Journal of Money, Credit, and Banking, 35(5), 787–799. https://doi.org/10.1353/mcb.2003.0039
Shieh, J. C. P. (2022). Financial management. BestWise.
Teräsvirta, T. (1994). Specification, estimation, and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association, 89(425), 208–218. https://doi.org/10.1080/01621459.1994.10476462
Teräsvirta, T., & Anderson, H. M. (1992). Characterizing nonlinearities in business cycles using smooth transition autoregressive models. Journal of Applied Econometrics, 7(S1), S119–S136. https://doi.org/10.1002/jae.3950070509
Tsay, R. S. (1989). Testing and modelling threshold autoregressive processes. Journal of the American Statistical Association, 84(405), 231–240. https://doi.org/10.1080/01621459.1989.10478760
Wang, S. Y. (2017). The relationship between Taiwan 50 ETFS and stock market [Master thesis, National Kaohsiung First University of Science and Technology].
Wang, Y. (2023). Long-run effects of monetary policy of China on its economic growth. The Chinese Economy, 56(6), 431–440. https://doi.org/10.1080/10971475.2023.2200662
Wu, P. C., & Lee, C. C. (2014). The threshold effect of Central Bank’s intervention on the nexus of trade balance and macroeconomic determinants. The Empirical Economics Letters, 13, 763–772.
Wu, P. S., Cheng, W. S., Chiu, C. L., & Chiu, T. H. (2002). The analysis of permanent and temporary correlation among monetary policy, exchange market and stock market. Commerce & Management Quarterly, 3(2), 161–177.
Yang, L. T. Y. (2020). The influence of Taiwan’s stock market on Bitcoin’s price under Taiwan’s monetary policy threshold. Applied Economics, 52(45), 4967–4975. https://doi.org/10.1080/00036846.2020.1751802
Yang, T. Z., Hung, P. V., Chang, C.-J., & Nguyen, N. P. (2021). The influences of stock market on exchange-traded fund under the threshold effect of monetary policy in China. The Singapore Economic Review. https://doi.org/10.1142/S021759082150079X
Yu, F. M. (2018). A study of relationship among Taiwan 50 ETFS, Taiwan 50 securities and market momentum [Master thesis, National Cheng Kung University].