Measuring asymmetry and persistence in conditional volatility in real output: evidence from three East Asian tigers using a multivariate GARCH approach

Abstract

We search for evidence of conditional volatility in the quarterly real Gross Domestic Product (GDP) growth rates of three East Asian tigers: Singapore, Hong Kong and Taiwan. The widely accepted Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH)-type model is used to capture the existence of asymmetric volatility and the potential structural break points in the volatility. We find evidence of asymmetry and persistence in the volatility of GDP growth rates. It is noted that the structural breakpoints of volatility correspond reasonably well to the historical economic and political events in these economies. Policy implications from our findings are discussed.

Keywords:

• East Asian tigers
• real output
• GARCH
• structural changes
• persistence
• asymmetric volatility

JEL Classification:

• F14
• F31
• P21

Acknowledgements

The authors wish to thank the journal editor, Professor Mark Taylor, and anonymous referees for extremely valuable comments. We also thank Wai Sum Chan, Chialin Chang, Michael McAleer, Les Oxley, and conference participants at the IMACS/MODSIM 18th World Congress in Cairns for helpful comments and suggestions. The second author wishes to thank SCAPE at NUS for providing research support. The third author wishes to acknowledge the financial support of a Strategic Research Grant from ECU.

Notes

¹ Recently there are a number of studies on the causal impact of inflation uncertainty on inflation using the GARCH approach (see, for instance, Baillie et al., 1996; Grier and Perry, 1998, 2000; Grier et al., 2004; Bredin et al., 2009). However, the evidence is mixed. Bredin et al. (2009) find uncertainty regarding the output growth rate, which is related negatively to the average growth rate, and inflation and output uncertainty have a mixed effect on inflation.

² In contrast to the close economic tie of both Hong Kong and Singapore with Mainland China, Taiwan's economic relation with the Mainland is indirect. Because the ‘full three links’ (namely, direct trade, transportation and communications links) between Mainland China and Taiwan have been ‘frozen’ over the past half century, cross-straits trade and investment have been conducted indirectly via a third territory, mainly through Hong Kong and Singapore. Therefore, this is not surprising to see the impact of any political unrest, such as the Tiananmen event in 1989, in the Mainland on these three economies. See Zhang et al. (2003).