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Forecasting volatility and value at risk of an Islamic tangency portfolio
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Academic literature arrives at diverse conclusions about the volatility forecasting accuracy of GARCH and EWMA models. Most studies analyse conventional equities, not focusing on shariah-compliant investing and the Islamic community. In this study, GARCH and EWMA models under different distributional assumptions were used to evaluate the one-step-ahead volatility and VaR forecasting accuracy for an Islamic Tangency Portfolio. Analysis confirms findings by Ding & Meade(2010) and shows that EWMA also outperforms GARCH(1,1) models for a sharia-compliant portfolio under short selling restrictions, while indicating the lowest failure rate of actual losses exceeding predicted VaR estimates.
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Islamic portfolio Volatility forecasting Backtesting