The influence of direct cross-straits shipping on the smooth transition dynamics of stock volatilities of shipping companies

Abstract

This article use the smooth transition Generalized Autoregressive Conditional Heteroscedastic (GARCH) model to examine the impacts of direct cross-strait shipping on the dynamic structure of the stocks of shipping companies in Taiwan. We inferred the fact that the structural changes affect the volatility process for all stocks of shipping companies. In addition, we obtain the transition function for all related stock volatilities of shipping companies and find that their structural adjustment processes launch prior to the introduction of direct cross-strait shipping. Meanwhile, the estimated transition functions show that the stock return volatilities of shipping companies have U-shaped patterns of structural changes. This article also caught the corresponding calendar dates of structural change about volatility pattern.

Keywords:

• direct cross-straits shipping
• smooth transition GARCH
• volatility
• regime change

JEL Classification::

• G00
• G14

Notes

¹ We separate Taiwan's shipping industry into three parts including the container shipping, tramp shipping and air transportation. The container shipping contains Wan Hai Lines Ltd. (WHL), Yang Ming Group (YML) and Evergreen Marine Corp. (EMC). The tramp shipping contains First Steamship Group (FSG), Sincere Navigation Corp. (SNC), Eastern Media International (EMI), U-Ming Marine Transport Corp. (UM) and Shin Wei Navigation Ltd. (SWN). The air transportation contains China Airlines (CA), EVA Air (EVA) and Farglory Free Trade Zone (FTZ).

² We assume that the threshold value as the time line. We use the dummy variable to separate the pre- and post-event. In this content, we define the known threshold value as the launching day for direct cross-strait shipping.

³ The proportion of average total trade between Taiwan and mainland China is 20.04 for 2005, 20.65 for 2006, 21.95 for 2007, 21.23 for 2008 and 22.89 for 2009.