Anticipating Stock Returns using the Autoregressive Integrated Moving Average Model

Mustafa Afeef, Fayaz Ali Shah, Shahid Jan Kakakhel


Will the stock market go up or down? Only few investors, if any, might be able to bequeath meticulous predictions. However, since most of the subject matter in Finance is future oriented, the capability of investors to forecast the future is of utmost importance. When it comes to predicting movements in a stock market, one way is to take account of all those factors, particularly macroeconomic in nature, that have a bearing on the upward and/or downward movement of stock prices as a whole. There is, nevertheless, another way of forecasting a time series, and that is, to foresee its future values by looking at its past values. Therefore, the autoregressive integrated moving average method was employed for the study that accounted for the lagged values of the variable and its disturbance term. Weekly figures of KSE 100 Index were taken for 22 years from 1997 to 2019 leading to 1143 observations. Results revealed that the model was able to predict the index quite precisely in the short run. The findings of the study might prove to be helpful for investors who wish to invest at Pakistan Stock Exchange in deciding when to increase, or decrease, investment in their portfolios.

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