The effectiveness of the sunshine effect in Taiwan's stock market before and after the 1997 financial crisis

Abstract

This study constructs a variety of GARCH models with the consideration of the generalized error distribution to analyze the relationship between the cloud cover and stock returns in Taiwan in the whole sample period (1986 to 2007) and in the two sub-sample periods (1986 to 1996 and 1997 to 2007). The data include Taiwan Stock Exchange Capitalization Weighted Stock Index, the primary eight stock sector indices, and the U.S. Dow Jones Industrial Average index to proxy the impact of U.S. stock market on Taiwan's stock market performance. The empirical finding of this study could be used to reconfirm the existence of the so-called sunshine effect. In addition, by comparing the long-run impulse multiplier effects of the cloud cover on the stock return in the two sub-sample periods; this study could examine the transition of the sunshine effect in Taiwan's stock market. The empirical results suggest that cloud cover has a significant negative impact on Taiwan's stock market, especially in the low cloud cover periods. Moreover, the pre-determined distribution of the error term plays an important role on the significance of the sunshine effect. The empirical result shows that most long-run multipliers are negative and the multiplier is more effective in the low cloud cover periods than in the high cloud cover periods.