Optimising Stock Market Indices for Emerging Economies: An Empirical Study of the Iraqi Stock Exchange

Abstract

This research explores the efficiency of different ways to construct a stock market index in the Iraqi Stock Exchange (ISX) context, an emerging market with unique traits. Five methods are considered: Price-Weighted Index (PWI), Equal-Weighted Index (EWI), Geometric Mean Index (GMI), Risk-Weighted Index (RWI) and Volatility-Weighted Index (VWI). The ISX60 index is used as a benchmark against their performance. The study employs 57 stocks listed on the ISX from August 2022 to August 2024, covering two years. We examine each method’s stability, performance, and representativeness through graphical analysis and comparative evaluation when building an index. The results indicate that broader indices with more components show higher stability under all constructions. GMI works well in tracking general trends across the market, while RWI and VWI appear effective at controlling risk and reducing exposure to volatile assets, respectively. It also underscores diversification as critical for constructing indices and tradeoffs between representation versus stability in emerging markets. Such insights enhance understanding of how indices can be created in developing financial systems and have practical implications for investors, policymakers, and financial analysts operating within Iraqi or similar emerging economy settings.