A Threshold GARCH Model for Chilean Economic Uncertainty

Diego Chávez, Javier E. Contreras-Reyes () and Byron Idrovo
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Diego Chávez: Instituto de Estadística, Facultad de Ciencias, Universidad de Valparaíso, Valparaíso 2360102, Chile
Javier E. Contreras-Reyes: Instituto de Estadística, Facultad de Ciencias, Universidad de Valparaíso, Valparaíso 2360102, Chile

JRFM, 2022, vol. 16, issue 1, 1-15

Abstract: In this paper, an autoregressive moving average (ARMA) model with threshold generalized autoregressive conditional heteroscedasticity (TGARCH) innovations is considered to model Chilean economic uncertainty time series. Uncertainty is measured through the Business Confidence Index (BCI) and Consumer Perception Index (CPI). The BCI time series provide useful information about industry; commerce; the finance, mining, construction, and agricultural sectors; and the global economic situation and the general business situation. As a counterpart, the CPI time series measure the perception of consumers regarding the state of the Chilean economy, evaluating their economic situation and expectations. The ARMA-TGARCH model is compared with the classical seasonal ARIMA and threshold AR ones. The results show that the ARMA-TGARCH model explains the regime changes in economic uncertainty better than the others, given that negative shocks are associated with statistically significant and quantitatively larger levels of volatility produced by the COVID-19 pandemic. In addition, a diagnostic analysis and prediction performance illustrates the suitability of the proposed model. Using a cross-validation analysis for the forecasting performance, a proposed heteroscedastic model may effectively help improve the forecasting accuracy for observations related to pessimism periods like the social uprising and the COVID-19 crisis which produced volatility in the Chilean uncertainty indexes.

Keywords: TGARCH; economic uncertainty; time-series analysis; COVID-19 pandemic; Chile (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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