A SETAR Model for Taiwan Stock Exchange Capitalization Weighted Stock Index: Non-linearities and Forecasting Comparisons

Abstract

In this paper, we analyze the change in structure which occurred in Taiwan stock index, while finding a better non-linear model. We examine the out-of sample performance of non-linear time series SETAR model by employing Taiwan Stock Exchange Capitalization Weighted Stock Index over the period from January 3, 2005 to December 31, 2009. Furthermore, we do the unit root test before the model setting and then compare the out-of-sample forecasting performances between standard linear ARIMA model and non-linear SETAR model. Empirically, we find that non-linear SETAR model has superior forecasting power than linear ARIMA model does in Taiwan stock market.