Optimising Stock Market Indices for Emerging Economies: An Empirical Study of the Iraqi Stock Exchange
DOI:
https://doi.org/10.57125/FEL.2024.12.25.09Keywords:
Stock Market indexes, Iraq Stock Exchange, ISX, Price-Weighted Index, emerging economiesAbstract
This research explores the efficiency of different ways to construct a stock market index in the Iraqi Stock Exchange (ISX) context, an emerging market with unique traits. Five methods are considered: Price-Weighted Index (PWI), Equal-Weighted Index (EWI), Geometric Mean Index (GMI), Risk-Weighted Index (RWI) and Volatility-Weighted Index (VWI). The ISX60 index is used as a benchmark against their performance. The study employs 57 stocks listed on the ISX from August 2022 to August 2024, covering two years. We examine each method’s stability, performance, and representativeness through graphical analysis and comparative evaluation when building an index. The results indicate that broader indices with more components show higher stability under all constructions. GMI works well in tracking general trends across the market, while RWI and VWI appear effective at controlling risk and reducing exposure to volatile assets, respectively. It also underscores diversification as critical for constructing indices and tradeoffs between representation versus stability in emerging markets. Such insights enhance understanding of how indices can be created in developing financial systems and have practical implications for investors, policymakers, and financial analysts operating within Iraqi or similar emerging economy settings.
References
Amenc, N., Goltz, F., & Lodh, A. (2012). Choose your betas: Benchmarking alternative equity index strategies. Journal of Portfolio Management, 39(1), 88–111. https://doi.org/10.3905/jpm.2012.39.1.088
Arnott, R. D., Hsu, J., & Moore, P. (2005). Fundamental indexation. Financial Analysts Journal, 61(2), 83–99. https://doi.org/10.2469/faj.v61.n2.2718
Asness, C. S., Frazzini, A., & Pedersen, L. H. (2019). Quality minus junk. Review of Accounting Studies, 24(1), 34–112. https://doi.org/10.1007/s11142-018-9470-2
Barberis, N., Shleifer, A., & Wurgler, J. (2005). Comovement. Journal of Financial Economics, 75(2), 283–317. https://doi.org/10.1016/j.jfineco.2004.04.003
Bartram, S. M., Branke, J., & Motahari, M. (2020). Artificial intelligence in asset management. SSRN. https://doi.org/10.2139/ssrn.3692805
Bekaert, G., Harvey, C. R., & Mondino, T. (2023). Emerging equity markets in a globalized world. Emerging Markets Review, 56, Article 101034. https://doi.org/10.1016/j.ememar.2023.101034
Belanes, A., Saâdaoui, F., & Abedin, M. Z. (2024). Potential diversification benefits: A comparative study of Islamic and conventional stock market indexes. Research in International Business and Finance, 67, Article 102098. https://doi.org/10.1016/J.RIBAF.2023.102098
Ben-David, I., Franzoni, F., & Moussawi, R. (2017). Exchange-traded funds. Annual Review of Financial Economics, 9(1), 169–189. https://doi.org/10.1146/annurev-financial-110716-032538
Berg, F., Kölbel, J. F., & Rigobon, R. (2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, 26(6), 1315–1344. https://doi.org/10.1093/rof/rfac033
Bonanno, G., Vandewalle, N., & Mantegna, R. N. (2000). Taxonomy of stock market indices. Physical Review E, 62(6), R7615–R7618. https://doi.org/10.1103/PhysRevE.62.R7615
Carter, R. B., & Van Auken, H. E. (1990). Security analysis and portfolio management. The Journal of Portfolio Management, 16(3), 81–85. https://doi.org/10.3905/jpm.1990.409271
Choueifaty, Y., & Coignard, Y. (2008). Toward maximum diversification. Journal of Portfolio Management, 35(1), 40–51. https://doi.org/10.3905/JPM.2008.35.1.40
Chow, T. M., Hsu, J., Kalesnik, V., & Little, B. (2011). “A survey of alternative equity index strategies:” Author response. Financial Analysts Journal, 67(6), 16–20. https://doi.org/10.2469/faj.v67.n6.9
Clarke, R., De Silva, H., & Thorley, S. (2013). Risk parity, maximum diversification, and minimum variance: An analytic perspective. Journal of Portfolio Management, 39(3), 39–53. https://doi.org/10.3905/jpm.2013.39.3.039
Dash, S., & Loggie, K. (2008). Equal weight indexing—five years later. SSRN. https://dx.doi.org/10.2139/ssrn.1321726
David, S. A., Inácio, C. M. C., & Tenreiro Machado, J. A. (2021). The recovery of global stock markets indices after impacts due to pandemics. Research in International Business and Finance, 55, Article 101335. https://doi.org/10.1016/J.RIBAF.2020.101335
Dávila, E., & Parlatore, C. (2023). Volatility and informativeness. Journal of Financial Economics, 147(3), 550–572. https://doi.org/10.1016/j.jfineco.2022.12.005
de Dios-Alija, T., del Río Caballero, M., Gil-Alana, L. A., & Martin-Valmayor, M. (2024). Stock market indices and sustainability: A comparison between them. Journal of Sustainable Finance and Investment, 14(3), 642–657. https://doi.org/10.1080/20430795.2021.1896988
Duffie, D., & Stein, J. C. (2015). Reforming LIBOR and other financial market benchmarks. Journal of Economic Perspectives, 29(2), 191–212. https://doi.org/10.1257/jep.29.2.191
Duterme, T. (2023). The engineering of stock market indices: winners and losers. Journal of Cultural Economy, 16(1), 17–31. https://doi.org/10.1080/17530350.2022.2098513
Elton, E. J., & Gruber, M. J. (1974). Portfolio theory when investment relatives are lognormally distributed. The Journal of Finance, 29(4), 1265–1273. https://doi.org/10.1111/j.1540-6261.1974.tb03103.x
Faraj, M. M. (2021). The impact of financial development on economic growth in Iraq for the period (2004–2018): An analytical econometric study. Journal of Economics and Administrative Sciences, 27(126), 517–533. https://doi.org/10.33095/jeas.v27i126.2122
Fernholz, R., Garvy, R., & Hannon, J. (1998). Diversity-weighted indexing. Journal of Portfolio Management, 24(2), 74–82. https://doi.org/10.3905/jpm.24.2.74
Gerlein, E. A., McGinnity, M., Belatreche, A., & Coleman, S. (2016). Evaluating machine learning classification for financial trading: An empirical approach. Expert Systems with Applications, 54, 193–207. https://doi.org/10.1016/j.eswa.2016.01.018
Gil-Alana, L. A., Abakah, E. J. A., & Rojo, M. F. R. (2020). Cryptocurrencies and stock market indices. Are they related?. Research in International Business and Finance, 51, Article 101063. https://doi.org/10.1016/j.ribaf.2019.101063
Guo, H., & Polak, P. (2021). Artificial intelligence and financial technology FinTech: How AI is being used under the pandemic in 2020. Studies in Computational Intelligence, 935, 169–186. https://doi.org/10.1007/978-3-030-62796-6_9
Han, Y., Hu, T., & Yang, J. (2016). Are there exploitable trends in commodity futures prices?. Journal of Banking and Finance, 70, 214–234. https://doi.org/10.1016/j.jbankfin.2016.04.013
Jacobs, P. D., Bruce, I., & Levy, K. N. (2015). Smart beta: Too good to be true?. Journal of Financial Perspectives, 3(2). https://ssrn.com/abstract=3083567
Junior, L., Mullokandov, A., & Kenett, D. (2015). Dependency relations among international stock market indices. Journal of Risk and Financial Management, 8(2), 227–265. https://doi.org/10.3390/jrfm8020227
Karolyi, G. A., & Wu, Y. (2018). A new partial-segmentation approach to modeling international stock returns. Journal of Financial and Quantitative Analysis, 53(2), 507–546. https://doi.org/10.1017/S0022109017001016
Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. American Economic Review, 88(3), 537–558. https://www.jstor.org/stable/116848
Li, F., Chow, T. M., Pickard, A., & Garg, Y. (2019). Transaction costs of factor-investing strategies. Financial Analysts Journal, 75(2), 62–78. https://doi.org/10.1080/0015198X.2019.1567190
Lim, D. T. ., Goh, K. W. ., Sim, Y. W. ., Mokhtar, K. ., & Thinagar, S. . (2023). Estimation of stock market index volatility using the GARCH model: Causality between stock indices. Asian Economic and Financial Review, 13(3), 162–179. https://doi.org/10.55493/5002.v13i3.4738
O'Hara, M. (2015). High frequency market microstructure. Journal of Financial Economics, 116(2), 257–270. https://doi.org/10.1016/j.jfineco.2015.01.003
Plyakha, Y., Uppal, R., & Vilkov, G. (2012). Why does an equal-weighted portfolio outperform value- and price-weighted portfolios?. SSRN. https://doi.org/10.2139/ssrn.1787045
Rauterberg, G. V., & Verstein, A. (2012). Index theory: The law, promise and failure of financial indices. Yale Journal on Regulation, 30(1), 1–62. https://repository.law.umich.edu/articles/2302/
Shoven, J. B., & Sialm, C. (2000). The Dow Jones Industrial Average. The Journal of Wealth Management, 3(3), 9-18. https://doi.org/10.3905/jwm.2000.320332
Siegel, J. J. (2022). Stocks for the long run: The definitive guide to financial market returns & long-term investment strategies (6th ed.). McGraw-Hill Education.
Statman, M. (2014). Behavioral finance: Finance with normal people. Borsa Istanbul Review, 14(2), 65–73. https://doi.org/10.1016/j.bir.2014.03.001
Wurgler, J. A. (2012). On the economic consequences of index-linked investing (Working paper No. 16376). National Bureau of Economic Research. https://econpapers.repec.org/paper/nbrnberwo/16376.htm
Yermack, D. (2017). Corporate governance and blockchains. Review of Finance, 21(1), 7–31. https://doi.org/10.1093/rof/rfw074
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 authors
This work is licensed under a Creative Commons Attribution 4.0 International License.
