The cross-sectional and cross-temporal universality of nonlinear serial dependencies: Evidence from world stock indices and the Taiwan Stock Exchange

Abstract

This paper studies a variety of world financial market indices to determine how widespread the phenomenon of nonlinear serial dependency is, and then, by studying a relatively financially isolated market, the Taiwan Stock Exchange of the 1980s, examines more closely the extent to which nonlinearity appears to be an inherent feature of financial trading behavior. Nonlinearity is found to be a cross-sectionally universal phenomenon, existing within all the markets studied and within the vast majority of individual stocks traded on the Taiwan Stock Exchange. However, closer examination of the nonlinearity via a windowed testing procedure reveals that such dependencies do not appear to be cross-temporally universal; rather, the data seem to be characterized by relatively few brief episodes of extremely strong dependencies that are followed by longer stretches of relatively quiet behavior. Thus, the modeling of the extant nonlinearity appears to be problematic at best.