Real GDP growth rates of Singapore, Taiwan and Hong Kong: An asymmetric multivariate GARCH approach
Modelling and Simulation Society of Australia and New Zealand
Faculty of Business and Law
School of Accounting, Finance and Economics
The economies of Hong Kong, Singapore and Taiwan have become known as "East Asian Tigers,"enjoyed a remarkable record of high and sustained economic growth over three decades from 1965 to the early 1990s. Their ability to achieve a speedy development with equity has intrigued many economists who attempted to understand the drive of growth. Most of this miraculous growth is believed due to a combination of fundamentally sound development policies, tailored interventions, and an unusually rapid accumulation of physical and human capital, as well as rapid intra-regional trade integration. Recently GARCH-type models have been applied to analyze growth rates of real gross domestic product (GDP) in developed and under-developed countries. However, few studies actually employ multivariate GARCH-type models such as the constant conditional correlation (CCC) model by Bollerslev (1990), dynamic conditional correlation (DCC) model by Engel (2002) and varying correlation MGARCH (VC-MGARCH) by Tse and Tsui (2002) for such purposes. Other studies using such models concentrate on interactions between real output and price, and between real output and stock performance. In this paper, we examine both the GARCH-type effect and the conditional correlation of the real GDP growth rates for Singapore, Taiwan and Hong Kong. We use the well-established exponential GARCH model of Nelson (1991) to capture the possibly asymmetric conditional volatility in the real GDP growth rates. And the conditional variance and covariance matrix is linked by using CCC-MGARCH and VC-MGARCH models. Our findings are consistent with findings by Ho and Tsui (2003) in which the negative real GDP shocks seem to have greater influence on future volatilities as compared to positive shocks of the same magnitude. Moreover, we apply the MISCC algorithm by Sansó et al. (2004) to identify the potential structural break points. We find support for structural breaks in conditional variance, and the quality of the estimation results will be improved if the structural breakpoints are counted in estimation, Our findings have important implications to both academics and macroeconomic policy-makers.With the presence of asymmetric volatility, the policy-makers need to be more pro-active in formulating their economic stimulating policy during periods of negative impacts. This is because, when negative shocks happen, investors would normally have negative sentiment and over-react to the shocks, which can make the already-sinking economy even worse. In addition, the existence of persistence in volatility implies that, when the volatility is high at certain time, it is very likely that this volatility will persist. Thus, when negative shocks occur, there would be an additional effect caused by both asymmetry and persistence in volatility, namely asymmetry causes higher volatility which then, as a result of volatility persistence, would intensify the problem. During the time of positive impacts, the economies may face a quick overheating problem due to investors' over-reaction. Therefore an appropriate counter-cyclical policy measures have to been made by the government to respond to the adverse impact of negative shocks and to stabilise the macroeconomic environment. The ability to identify breakpoints would provide policy-makers with additional information to identify the causes of the volatility and help to stabilize the macroeconomy. Finally, the findings also indicate that negative economic disturbances arising from one economy may spill over to another one through the strong economic linkages. As such, international economic policy co-ordination would become imperative to ameliorate the effect of shocks originating from other economy.