The Impact of Financial Crisis and Trade Relevance on the Market Reactions in Taiwan’s Financial Ind

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Invention Journal of Research Technology in Engineering & Management (IJRTEM) ISSN: 2455-3689 www.ijrtem.com Volume 2 Issue 11 ǁ November 2018 ǁ PP 01-15

The Impact of Financial Crisis and Trade Relevance on the Market Reactions in Taiwan’s Financial Industry Bi-Huei Tsai Professor Department of Management Science, National Chiao Tung University 1001 Ta-Hsueh Road, Hsinchu 300, Taiwan ABSTRACT: Previous literature seldom investigates whether financial crisis events or events caused by trade-related countries have great impact on stock returns. However, the event characteristics and occurrence areas are critical of financial contagion effect. For these reasons, this study investigates market response of international events from 2008 to 2016 to confirm the financial contagion theory by examining the stock returns of Taiwan’s financial industry. We examine whether financial crisis causes greater market response of Taiwan’s financial industry than non-financial crisis event since Taiwan’s financial industry invest in foreign funds or stocks. This study uses event study method to observe the abnormal returns on the event day. We further use analysis of variance (ANOVA) to compare the impact of financial crisis events on stock returns with the impact of non-financial crisis events on stock returns in Taiwanese listed financial industry. In addition, we compare the market response between events occurred in countries that have high trade relevance to Taiwan and countries that have little association with Taiwan. The results show that Taiwan financial industry had significantly abnormal returns when international financial crisis events happened. A price co-movement in other market causes a shock in Taiwan’s stock market. Furthermore, ANOVA analysis results show that impact of international financial crisis events is larger than that of international non-financial crisis events in Taiwan’s financial industry, which proves financial contagion theory. Moreover, market response to the events occurred in Taiwan’s trade related centuries, U.S. and Japan, is larger than the events occurred in other countries that contain low relevance to Taiwan. KEYWORDS: Financial industry, Abnormal Return, Cumulative Abnormal Return, Market Response, Analysis of variance I. INTRODUCTION This study explores the impact of financial crisis events on stock returns in Taiwanese financial industry. According to “Financial Supervisory Industry Development Policy White Paper” announced by FSC on May 17, 2016, the total value of financial industry output in 2015 reached NT $1.09 trillion, preceded only by manufacturing industry, wholesale and retail trade, and real property industry. It accounts for up to the GDP 6.56% in Taiwan. It is obviously that the financial industry is important in Taiwan, so this is why we focus on the market reactions to the financial crisis events in Taiwanese financial industry. By the end of 2015, Taiwan ‘s financial industry’s asset management (including overseas funds) scale up to NT $13.8823 billion. The financial industry occupies an important indicator in the economic structure of Taiwan. The main commodities of asset management chosen by Taiwanese investors including bank products, stock market, funds and insurance policies. The mostly trade foreign funds focus on products, foreign stocks, and ETFs are concentrated in the United States, Luxembourg and Hong Kong. With the diversified investment channels in different countries and market, the international financial products in Taiwan's financial industry are increasing. Therefore, listed financial industry in Taiwan are affected by international financial crisis events on Taiwan. Financial economic fluctuations related studies investigate the chaos caused by specific events (Bernanke and Gertler, 1989; Bernanke, 1983), including stock market volatility caused by natural disasters (Shelor, Anderson, and Cross, 1990; Worthington and Valadkhani, 2004), and stock market volatility caused by terrorist attacks (Brounen and Derwall, 2010; Carter and Simkins, 2004; Drakos, 2004). Brounen and Derwall (2010) studied the impact of terrorist attacks on the equity markets in eight countries on an event day, with

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