Abstract
The trading and investment activities in Taiwan usually vary with the business cycle and equity investment in the US. Many studies indicate that the equity market is closely related to the macroeconomic environment. Therefore, the purpose of this study is to construct a multivariate VEC GJR DCC-GARCH-M model to investigate the volatility and the interrelationship between the US equity market and macroeconomic variables. The variables chosen in the empirical analysis include the US NASDAQ (National Association of Securities Dealers Automated Quotation) price index, the CPI (Consumer Price Index), M1b and the exchange rate of the US dollar. Furthermore, the empirical results of this study signify that the US stock rate of returns can be forecasted by the behavior of the macroeconomic variables and the US stock index leads the indicators of the business cycle in the US. The evidence verifies the existence of a risk premium effect in the US equity market. The empirical results also indicate that the stock volatility exhibits a GARCH effect and can be forecasted by the previous period's conditional variance. Finally, we also find that there are significant effects of volatility clustering and asymmetric volatility (the leverage effect) in the US equity market.
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