Credit guarantee, Market-based, Risk neutral, Actuarial pricing theory, G21, C51, C61, L26,

Though the Financial Holding Company Act in Taiwan permits banks, securities firms and insurance companies to affiliate, identifying the influence on Taiwan's financial holding companies hasn't been discussed rigorously yet. This paper presents a formal methodology, using two-state Markov regime switching approach, to allow for the uncertainty event-date of financial holding companies' stock return and risk. This study serves as one of the first studies that adopt a Markov regime-switching model to estimate financial holding companies' stock behaviour. The evidence shows that 12 of 13 financial holding companies have regime-switching and one has no regime-switching in Taiwan. Therefore, the stock behaviours of Taiwan's financial holding companies follow two regimes and the traditional linear model cannot be descriptive. However, the levels of 12 financial holding companies' risk are significantly low of state 1 and stock returns are indifferent between two states. Hence, there are diversification benefits of Taiwan's financial holding companies. Summarily, to assess the influence on Taiwan's financial holding companies, it is recognized that this methodology developed by the model is meaningful for research.

This paper presents a formal methodology, using a market-based risk neutral approach, to gauge the credit risk of guarantee issues in a Taiwanese bills finance company. In particular, the probability of default is endogenously determined. Evidence shows that the recovery rate plays an important role in credit risk of a bills finance company's guarantee issues. On the other hand, credit risk is also correlated with different industries and business cycles, and care must be taken to consider these factors. Faced with the implementation of the Basel Capital Accord, it is anticipated that this paper will be helpful to Taiwan's financial institutions.

This paper employs panel data regression analysis to explore the measurable differences in risk-capitalization relationship between FHC and non-FHC organized Banks. The main contribution of this paper is in explaining some rethinking which shows the business of FHCBs take more risk than that of NFHCBs, and high degree of capitalization is negatively associated with asset risk and has higher interest rate spread increased bank’s asset risk in FHCBs only. It obviously has its strong anti-incentives domination for high capital banks group in NFHCHs, which a high degree of loans ratio, loans ratio is positively associated with asset risk in NFHCBs only. A large degree of bank size, bank size is negatively associated with asset risk in FHCBs only. The prior studies and previous hypothesis indicate that risk level increases when the bank capital size is high but the finding in this paper is inconsistent with the previous research.

This paper presents a stochastic financial model from which one can derive the optimal reserves ratio for stabilizing price level. It is shown that the optimal reserves ratio is a function of the structure of unanticipated shocks to liquid asset market and high-powered money market. An important policy implication, drawn from my model, suggests that it may help for the stabilization of price level if a lower level of the reserve requirements was adopted by the central bank when the shock exists solely in liquid asset market. An application of the presented model to the financial assets in Taiwan suggests that the optimal reserves ratio for stabilizing price level is approximately 5.7717 per cent in the case of the 2-SLS estimation, and 4.2442 per cent in the case of the SUR estimation, below the weighted average of actual 7.7575 per cent up to the end of 1997. The empirical findings further suggest Taiwan's monetary authority would thus have to accept a lower level of the reserve requirements in order to reduce the price fluctuations.