Nonlinear Dynamics Between the Investor Fear Gauge and Market Index in the Emerging Taiwan Equity Market

Nonlinear models that include the threshold autoregressive model and the threshold cointegration model (TVECM) are applied from the behavioral finance point of view to examine the dynamics between the investor fear gauge proxied by the volatility index (<i>TVIX</i>) and the market index (<i>TAIEX</i>) in Taiwan. If the <i>TVIX</i> is in the extreme higher regime identified by the TAR, the overreaction of the investors' fear gauge could be the leading indicator of the market. However, in the extreme lower regime identified by the TVECM, the <i>TAIEX</i> returns would drive the deviation between the indexes to convergence.