Forecasting Islamic Stock Market Volatility: An Empirical Evidence from Pakistan Economy

Abstract

Islamic investment particularly, in stocks has revealed an incredible growth in the 21st century. The growing demand of Islamic finance in Pakistan has asserted the main controllers of stock market to launch Islamic index for assisting investors in buying and selling of shares in alignment to their religious beliefs. Though Pakistan is deficient in having a proper Islamic stock market but Al-Meezan and Karachi Stock Exchange has initiated an Islamic stock market by the name of Karachi stock exchange Meezan index (KMI-30). This study uses time series analysis for the forecasting of Islamic stock index of Pakistan under the influence of volatility. The daily data of KMI-30 of five days per week starting from 1st September 2008 to 3rd May 2012 is taken. The output reveal that Muslim investors can earn substantial revenues by investing in Islamic stock indices and can also achieve their peace of mind by aligning their investments to their religious values. The results of Box-Jenkins methodology show that ARIMA model with the value of (2, 1, 0) and Generalized Autoregressive Conditional Heteroskedasticity shows that GARCH with the value of (1, 1) are the best models for forecasting of KMI-30 in Pakistan. Hence, the study assists policy makers, practitioners and investors who desire to make alignment in their financial investment and religious values.