Amina Aftab (M.Phil.

in Commerce)

Comparative Analysis of KSE-30 and KMI-30 indexes: An Application of ARCH

and GARCH Model
A comparative analysis of sharia index KMI 30 and conventional
indexes is very important because investors especially Muslims
investors are interested in the performance of Sharia index which is
doing better all over the world.
The research will involve the risk analysis and forecasting of Islamic
index KMI-30 and KSE-30 conventional index. This comparative
study on daily data has not been done before in Pakistan.

Importance

Uniqueness of
Research Study
Data
Data Source

Variables

Problem
Statement

Number of
Literature
Reviewed (for
synopsis)
Research
Objectives

6 years (Sep2008 Sep2012) daily data

Secondary source
Univariate comparative study between two variables
KSE-30 index
It is Karachi Meezan index based on free float market capitalization.
It includes top 30 companies. KSE has taken as conventional index of
Pakistan.
KMI-30 index
It is Islamic index or shariah index on Pakistan based on Islamic
principles.
Stock market is a risky market and since people cannot accurately predict the
next moment so measuring the risk performance and forecasting is important
in a field of stock market where more challenging issues are raised. When
there is reasonable predictions with less biasness done the investor will earn
profit it will help management to take decision.
Many forecast models and risk performances are measured by researchers to
forecast stock prices of conventional stocks like KSE-100 index to help
investors but no attention is paid to Sharia compliance KMI-30 forecasting
which is not based on interest and KSE-30 index based on free flow of
capitalization. Due to better performance of Islamic index KMI-30 it is
important to measure the risk of stock index values of KMI-30 and its
comparison with conventional index KSE-30 by using daily data which has
not done before in Pakistan. So there is a need of conducting this research.

15
The objectives of this study are:
1. To analyze the performance of the Islamic index and common index

UNIVERSITY OF CENTRAL PUNJAB

Amina Aftab (M.Phil. in Commerce)

and to test whether any significant difference between both indices in

Pakistan.
2. To find out which index (either KSE30 or KMI 30) is less risky to
provide investors suitable benchmark for returns on their equity
investments.
3. To find out whether principles of Shariah Compliant like prohibition
of riba, less debt to equity ratio and less investment in illiquid assets
are hindrance to build a profitable portfolio.
4. To forecast the volatility and returns of KSE30 and KMI-30 index
by using ARCH and GARCH method.

Hypotheses
Theoretical
Framework
Software
Population

Limitation of
the Study

H: KSE-30 index is risky than KMI-30 index.

H: KSE-30 is not risky than KMI-30 index.
Modern portfolio theory and Islamic theories of Riba
Eviews & SPSS
Karachi Stock Index
Firstly, stationary will be check by using unit root test. There are
many techniques to check the stationary but under this study Augmented
Dickey-Fuller unit root test will be used. Secondly volatility will be checked
by ARCH effects and thirdly the risk performance measurement and
forecasting will be done by applying Generalized Autoregressive conditional
heteroscedasticity GARCH model.
An augmented Dickey-Fuller test is a test to check the stationarity. An
augmented Dickey-Fuller test is a version of the Dickey-Fuller test for a
larger and more complicated set of time series models. After applying ADF
test we identify the unit root and then we will make the data stationary by
differencing. Then we will test volatility by ARCH by Engle model.
If volatility clustering is present in data then we will apply Generalized
Autoregressive conditional heteroscedasticity GARCH model for forecasting
and comparing risk.
It is univariate study in which we compare the performance of two indexes
that is KSE-30 and KMI-30 and at the end we will forecast both indexes for
future prospective to help the investors.

The unavailability of daily data of macroeconomic variables.

UNIVERSITY OF CENTRAL PUNJAB