Abstract of an Analysis of Economy Down-Term in Taiwan, United States, and United Kingdom

Abstract

Since the 2007-2009 recessions, the world’s equity market suffered tremendous losses with collapse of real estate market and banking system. The burst of US housing bubble, though it did not influence everywhere, still have caused numerous corporations filing for bankruptcy protections.

This thesis will aim to analyse the influences of the recession on several major equity market around the globe, which include the volatility of market returns on five indices, (TAIEX, FTSE TWSE 50 Index, NASDAQ, S&P 500, and FTSE 100) from Taiwan, United States, and United Kingdom before the recession of 2008-2009 and after the recession. This thesis aims to find the correlation between the volatility and recession, and whether the volatility of the market has increased after the recession or not.

The five indices will be put to the examination of stationarity, volatility clustering and independence using Augmented Dickey Fuller test, ARMA-GARCH models, and etc. Limits and errors of the models will be discussed along the examinations.

The second part of the thesis will propose a strategy using derivatives to hedge against the risk or whether it would be worthy to hedge against the risk. This section will discuss the significance of Black-Scholes option pricing model and GARCH option pricing model in hedging the risks in the equity market.

This thesis was able to find the pattern of returns in relation to the lead of the recession. On the other hand, the thesis was able to conclude that the market is currently recovering through time, which by the use of technical analysis in this thesis has demonstrated a return growing pattern in the charts. Furthermore, out of the two option pricing methods used in the thesis, the Heston-Nandi (HN) GARCH option pricing model seems to be more consistent, while the Black-Scholes model is more efficient.