The Influence of Defense Industry Development Act on the Smooth Transition Dynamics of Stock Volatilities of Defense Industry

Abstract

Abstract This study aims to investigate the impacts of the Defense Industry Development Act on the volatility of the defense industry as geopolitical risk is raised. Applying the smooth transition generalized autoregressive conditional heteroskedasticity (ST-GARCH) model for daily defense stocks, we demonstrate that the structure breaks in the volatility dynamics process of all defense stocks for Taiwan. The empirical findings show that most defense stocks started the adjustment process more than one year before the date of launch of Defense Industry Development Act except Magnate Technology Corporation (MTC) and China Ship Building Corporation Taiwan (CSBC). The model specification tests suggest two types of transition functions including U-shaped and Z-shaped for all defense stocks. The estimated parameters indicate that the volatilities of returns in defense stocks for Taiwan have inverted U-shaped and inverted Z-shaped patterns of structure breaks. The volatilities of defense enterprise stock return shift by the event of Defense Industry Development Act. JEL classification numbers: G00, G14, G18, L52. Keywords: Geopolitical, Defense industry, Volatility, Structure change, Defense Industry Development Act