Financial Modelling and Efficiency Diagnosis of Indian Shariah Market

Abstract

This work seeks to analyze the behavior, informational and market efficiency of Indian Shariah market with regard to Weak form efficiency of Efficient Market Hypothesis. The study period covers from 01/January/2008 to 31/May/2013 on CNX 500, CNX NIFTY Shariah and S&P BSE Tasis 50 Shariah index. The paper employs traditional tools of identifying the efficiency of the returns with auto correlation and run test and advanced financial modelling tools like ARCH Mean model and GARCH(1,1) model. The results indicated that the Shariah market is inefficient in weak form and it is possible that investors may be able to earn abnormal profit by reviewing the movements of the market. As the market lacks informational efficiency it need to be corrected at the earliest because it is violating the principles laid down by Islamic guidelines. The existing informational inefficiency will help the rational investors to adopt the technical analysis in predicting the behavior of Shariah market at least in short run. But policy makers need to take cognizance action so that Indian Shariah index doesn't violate the principles of Islamic finance.