Modeling and Forecasting Volatility in Pakistan Stock Exchange

Analysis of time series is used to develop simple models which can forecast, interpret, and analyze the result concerning its field of application. The main purpose of this study was to check and model the volatility in Pakistan Stock Exchange (PSX) for the near future. The stock exchange data are highly volatile and there are many factors which affect the daily market returns. A developing country like Pakistan is interfered by the conditions of International Monetary Fund (IMF), dollar fluctuations and thus, it becomes very difficult to forecast these returns due to continuous effect of above and many other factors (which are unknowns). Generally, in the presence of these factors, the naive or simple models do not perform efficiently because of their ability to model averages and thus volatility models are used which model variation in the data. We used dataset from 2nd June 2006 to 23rd August 2020 using rolling window technique and find GARCH (3,2) as best model to forecast PSX returns