Policy Uncertainty and Asymmetric Volatility in Indonesia's Financial Sector: EGARCH Evidence

Mohammad Syifaul Qulub; Riska Ayu Setiawati

doi:10.61255/jeemba.v4i5.1344

Authors

Mohammad Syifaul Qulub Universitas Islam Negeri Sunan Ampel, Indonesia
Riska Ayu Setiawati Universitas Islam Negeri Sunan Ampel, Indonesia

DOI:

https://doi.org/10.61255/jeemba.v4i5.1344

Keywords:

Volatility, Economic Policy Uncertainty, EGARCH, Leverage Effect, World Uncertainty Index

Abstract

Purpose – This study examines the effects of domestic and global economic policy uncertainty on Indonesia's financial sector volatility, given its dominant market position and sensitivity to regulatory and capital flow shocks.

Design/methodology/approach – Monthly IDX Financial Index (JKFINA/IDXFINANCE) returns from January 2011 to December 2025 are analyzed using an EGARCH (1,1) model, with the World Uncertainty Index (WUI) for Indonesia, US EPU, and VIX entered jointly into the variance equation. Because default analytic standard errors proved unreliable in finite samples, inference relies on residual bootstrap, supported by distributional, subsample, and structural-break robustness checks.

Finding/Results – A leverage effect is confirmed and robust to bootstrap-based inference, with negative shocks raising conditional volatility more than equivalent positive shocks. None of the three uncertainty proxies (WUI, EPU, VIX) is robust under this inference, and neither structural break test finds evidence of a break around COVID-19.

Originality/Value – This study demonstrates, through multi-start optimization, residual bootstrap, and structural break testing, that default analytic standard errors from EGARCH-X estimation can be materially unreliable in finite monthly samples. Although this evidence comes from a single application, the underlying mechanism plausibly extends to similarly specified models; a bootstrap-based inferential remedy is proposed. It is also among the first studies to jointly incorporate the WUI for Indonesia, US EPU, and VIX into a single EGARCH variance equation for Indonesia's financial sector.

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