GARCH, jumps and permanent and transitory components of volatility: the case of the Taiwan exchange rate

Abstract

This paper investigates whether there are three distinctive features in financial asset prices, that is, time-varying conditional volatility, jumps and the component factors of volatility. It adopts a component-GARCH-Jump, which can efficiently capture the three features simultaneously. Our results demonstrate,that the three features exist in the Taiwan exchange rate. Besides time-varying conditional volatility, our model identifies 172 jumps between 5 January 1988 and 21 March 2003. The empirical evidence shows that the permanent,component,of the conditional variance is a relatively smooth movement,except for a fairly sharp shift which began in 1997. This means,that the effect of the Asian crisis shock might very well have exerted not only a transitory jump effect, but also a permanent effect on Taiwan’s exchange rate.