STRENGTHENING SYARIAH FINANCIAL MARKETS WITH GARCH-BASED STOCK PRICE FORECASTING AND VAR-RISK ASSESSMENT

Abstract

Indonesia, as the largest Muslim-majority country, has significant potential to enhance its Shariah financial sector, which has been growing rapidly, around 7.43% from 2023 to 2024, and contributing to the national economy. However, political and natural disasters have influenced the economy and Shariah-compliant stocks. This study focuses on forecasting Shariah-compliant stock prices using Generalized Autoregressive Conditional Heteroscedasticity (GARCH) models and estimating investment risks via Value at Risk (VaR) for four Islamic banks listed in IDX: BRIS, BTPS, BANK, and PNBS. The findings indicate that GARCH models effectively capture stock price dynamics and provide accurate 10-day forecasts. Additionally, the models reliably predict VaR, validated through backtesting at various confidence levels. These insights are valuable for financial regulators and risk managers, aiding in policy design to ensure market stability by enabling the implementation of measures such as stricter capital reserve requirements for institutions with high-risk exposure and mandatory adoption of advanced risk management techniques like dynamic stress testing. Such policies not only mitigate systemic risks during periods of financial volatility but also enhance the overall resilience and robustness of the financial system. For investors, accurate risk predictions support informed decision-making, enhance portfolio protection, and optimize risk management.

Keywords

• investment analysis
• market volatility
• risks management
• sharia finance