Forecasting risk using auto regressive integrated moving average approach: an evidence from S&P BSE Sensex

Abstract

The primary objective of the paper is to forecast the beta values of companies listed on Sensex, Bombay Stock Exchange (BSE). The BSE Sensex constitutes 30 top most companies listed which are popularly known as blue-chip companies. To reach out the predefined objectives of the research, Auto Regressive Integrated Moving Average method is used to forecast the future risk and returns for 10 years of historical data from April 2007 to March 2017. Validation accomplished by comparison of forecasted and actual beta values for the hold back period of 2 years. Root-Mean-Square-Error and Mean-Absolute-Error both are used for accuracy measurement. The results revealed that out of 30 listed companies in the BSE Sensex, 10 companies' exhibits high beta values, 12 companies are with moderate and 8 companies are with low beta values. Further, it is to note that Housing Development Finance Corporation (HDFC) exhibits more inconsistency in terms of beta values though the average beta value is lowest among the companies under the study. A mixed trend is found in forecasted beta values of the BSE Sensex. In this analysis, all the p-values are less than the F-stat values except the case of Tata Steel and Wipro. Therefore, the null hypotheses were rejected leaving Tata Steel and Wipro. The values of actual and forecasted values are showing the almost same results with low error percentage. Therefore, it is concluded from the study that the estimation ARIMA could be acceptable, and forecasted beta values are accurate. So far, there are many studies on ARIMA model to forecast the returns of the stocks based on their historical data. But, hardly there are very few studies which attempt to forecast the returns on the basis of their beta values. Certainly, the attempt so made is a novel approach which has linked risk directly with return. On the basis of the present study, authors try to through light on investment decisions by linking it with beta values of respective stocks. Further, the outcomes of the present study undoubtedly useful to academicians, researchers, and policy makers in their respective area of studies.

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