Inderscience Publishers

The impact of political risk for testing Taiwan's stock market

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This paper examines the vital role of political risk in stock trading. In Taiwan, the Kuomintang (KMT) Government has always been stable, since 1949, but the Progressive Party (DPP) has replaced KMI, and made huge impacts. I adopt the weighted attribute-adjustment methodology to measure the political risk variables, construct a multifactor model to link the political risk induced by Taiwan's first governmental change in May 1999, and analyse its influence on Taiwan's stock market trading. The results show that the political risk induced by governmental change resulted in a crisis of illiquidity in Taiwan's stock market. After the governmental change, the worsening situation in the domestic economy and the populace's lack of faith in the government were the key factors resulting in a serious shrinkage in Taiwan's stock trading.

Keywords: political risk, governmental change, stock market, Taiwan

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