Abstract
This study aims to investigate the volatility between Conventional and Islamic stock market by deploying Autoregressive Conditional Heteroskedastic (ARCH) model and Generalized ARCH (GARCH) models along with their variants, Power ARCH (PARCH), Threshold ARCH (TARCH) and Exponential GARCH (EGARCH) on comparable stock market index. Karachi Stock Exchange 30 index (KSE-30) was cross examined with the volatility of KSE Meezan Index (KMI-30) and Dow Jones Islamic Market Index (DJIMI) with Dow Jones Industrial Average (DJIA) to determine the existence of correlation and impact in the volatility of indices. Time effect is being analyzed in the study where the response time to external factors of growing Islamic Market Index is compared to that of a mature Conventional Market Index by applying lags and testifying the ARCH effect on the stationary data, arrived through Augmented Dickey Fuller test, including daily closing prices from 2012 to 2016. The results assess the most appropriate model for each index to be applied for the purpose of forecasting on the basis of volatility. It also established the relationship between comparable index volatility with identifying common denoting factor either the type of the index, that is, Islamic and Conventional or the Geographical Boundaries of the index.
Highlights
Financial crisis has impacted investors in making their strategies and designing their portfolio in a way that can help them conquer any adverse movements in the financial markets
KMI 30 was tested and the results suggest Akaike Information Criterion (AIC), SIC and Hannan-Quinn are all in favor of Generalized ARCH (GARCH) model to be applied for volatility estimations
The importance of index points have been established by many economists and the hindrance in performance is subject to the volatility and fluctuations that increases risks for the investors
Summary
Financial crisis has impacted investors in making their strategies and designing their portfolio in a way that can help them conquer any adverse movements in the financial markets. Stock portfolio and indexes were found to move in similar direction due to correlations that were not identified previously. The search of diversification through industry categories were focused upon where alternative assets with high growth became a focal point. In this scenario an average growth of 15 to 20 percent per annum was being realized by the Islamic financial sector over the past decade (IIFM, 2010) that made this sector an interesting opportunity for many investors. Allowing investors to identify the best model of predicting volatility between Islamic and Conventional Index will assist in better strategizing and decision making. Is there a relation between the stock indexes composed of conventional and Islamic shares?
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