Reliability of Exponential Smoothing Method for forecasting Islamic Share Price to oil and gas sector in Malaysian Stock Exchange

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Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016 Page 38-44 Reliability of Expoetial Smoothig Method for forecastig Islamic Share Price to oil ad gas sector i Malaysia Stock

1 Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016 Page Reliability of Expoetial Smoothig Method for forecastig Islamic Share Price to oil ad gas sector i Malaysia Stock Exchage Nashirah Biti Abu Bakar 1 ad Sofia Rosbi 2 1 Islamic Busiess School, College of Busiess, Uiversiti Utara Malaysia, Kedah, Malaysia, 2 Uiversiti Malaysia Perlis, Perlis, Malaysia Correspodig ashirah@uum.edu.my Article Iformatio Keywords Forecastig, Expoetial smoothig, Share price, Sharia-compliat securities, Malaysia Stock Exchage. Abstract This paper forecast the share price for two compaies that related with oil ad gas sector. These compaies are Sharia-compliat compaies that issues Iitial Public Offerigs (IPO) i year This paper usig forecastig methods which are simple movig average ad expoetial smoothig. The, these share prices are evaluated usig three types of error, which are mea absolute deviatio (MAD), mea squared error (MSE) ad mea absolute percetage error (MAPE). The results show expoetial smoothig is less error tha simple movig average. Therefore, expoetial smoothig is more suitable i forecastig the dyamic of share price. This result is to help ivestors to determie ad select share price with higher retur usig a accurate method. INTRODUCTION Fiacial iovatios trasformed the traditioal fiacial markets ito highly sophisticated markets featurig with high degree of liquidity ad wide-array of istrumets to share ad trasfer various sources of risk (Iqbal, 1999). This tred occurred i domestic ad iteratioal fiacial markets. This iovatio ad growth i fiacial markets was further iduced by advaces i the fiacial theory. This tred was occurred with itroducig the Islamic ivestmet. Islamic ivestmet was growth up rapidly ad ears outstadig recogitio from iteratioal fiacial markets i the last decade. Cotiuig success is the result of icreasig demad for Islamic fiacial products ad services by both domestic ad iteratioal fiacial itermediaries. Islamic bakig is o loger limited to the boudaries of Muslim coutries but is establishig roots i o-muslim coutries as well. Moreover, Islamic fiacial product ad service such as Islamic capital market is o loger restricted to Muslims people oly. Part from Islamic capital market, Iitial Public Offerigs (IPO) for sharia-compliat compaies is a alterative way for Islamic compaies to growig up ad develops. IPO is a commo stock that has bee widely examied i the fiace literature, ad academic iterest i IPO is cotiuously till today. IPO for sharia-compliat compaies is act as a alterative source for Islamic compaies to raise a capital for expase a busiess where the capital must be free from ay prohibited elemet such as usury (riba), gamblig (maisir), ad ucertaities (gharar) (Abdul Rahim & Yog, 2010). A large umber of studies have examied the performace of share price of IPO (Loughra, et al., 1994). This iterest may be related to the importace of IPO market for ecoomic growth ad employmet, but ofte the 38

2 Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016, Page focus is o the tremedous profit opportuities that IPO frequetly offer to ivestors (Bessler & Thies, 2007). I the same, the studies that focus o the performace of log-term IPO i Malaysia foud evidece that log-term performaces of IPO are performed better (How, et al., 2007). However, o prior academic has documeted the area of forecastig for share price of sharia-compliat i Malaysia. Thus, this study tries to fulfill this gap by forecast the log-term performace of IPO for sharia-compliat compaies usig expoetial smoothig. Specifically, this study examie log term performace of IPO for sharia-compliat compaies usig movig average methods ad compare with expoetial smoothig. Next, this study was aalysis the error i the aalysis. LITERATURE REVIEW May study was ivestigated the performace of stock markets worldwide (Boulto, et al. 2011). Various studies ivestigated the log term performace of IPO market foud IPO are uderperformed their bechmark. Ritter (1991) examies log term performace of IPO i Uited States foud the sigificat uderperform their bechmark. Carter et al. (1998) also foud IPO stocks are uderperformed relative to the market over a three-year holdig period is less severe for IPO hadled by more prestige uderwriters. The same result is reported by Cha, et al. (2004) i Chia. They foud IPO i Chia is slightly uderperformed. While, Lee, et al. (1996) report that Australia s IPO sigificatly uderperform market movemets i the three-year period subsequet to list. Goerge, et al. (2007) discusses the log-ru performace of UK IPO ad foud that the percetage of equity issued ad the degree of multiatioality of a firm are the key predictors of IPO performace i UK. Drobetz, et al. (2005) foud log ru uderperformace to the fact that IPO firms ted to be small firms whe used a small capitalizatio idex as a bechmark. Thus, uderperformed of log term IPO are observed i various coutries (Kirkulak & Davis, 2005). Therefore, it is importat to forecast the performace of share price to make sure that particular share ca give high retur. Stock markets are iflueced by complex factors ad oliear relatioships amog factors existed i differet periods such that forecastig the future stock treds for ivestors are extremely difficult (Kluger & McBride, 2011). Paul (2011) used expoetial smoothig techique to predict the future evets. Therefore, implemetatio of accurate forecastig methods is importat i predictig stock prices sice the stock market begis (Pavlov & Hur, 2012). Expoetial smoothig is oe of the accurate forecastig methods (Taylor, 2004). I this paper, we compare the simple movig average ad expoetial smoothig. The, three types of error are calculated. The three types of error are mea absolute deviatio (MAD), mea squared error (MSE) ad mea absolute percetage error (MAPE). METHODOLOGY I Malaysia Stock Exchage, there are 2 sharia-compliat compaies that issues Iitial Public Offerig i year of 2012 for oil ad gas sector. Table 1 show the list of the compaies. We select this sector because the decremet of the share price i this sector is the highest betwee years 2015 to I the same time the volatility of the share price durig 2015 util 2016 is the largest. TABLE I : List of Sharia compliace compaies that issues Iitial Public Offerigs (IPO) i year of 2012 for oil ad gas sector No. Stock Code Compay Board Sector SAPURA KENCANA PETROLEUM BERHAD MAIN MARKET OIL AND GAS GAS MALAYSIA BERHAD MAIN MARKET OIL AND GAS The first compay is Sapura Kecaa Petroleum Berhad. This compay is a oil field services compay based i Malaysia. It was formed via a merger betwee SapuraCrest ad Kecaa i May 2012.Sapura Kecaa provides solutios coverig the etire oil ad gas exploratio ad productio value chai. The compay operates i over 20 coutries icludig Malaysia, Brazil, the Uited States, Wester Africa ad the Middle East. The secod compay is Gas Malaysia Berhad. This compay is a atural gas distributio compay i Malaysia. The compay headquarters is located i Shah Alam, Malaysia. It has three regioal offices, located i Prai, Gebeg ad Pasir Gudag, ad seve brach offices located throughout Peisular Malaysia. The 55% of the 39

3 Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016, Page compay shares are held by MMC-Shapadu Holdigs, 25% by Tokyo Gas - Mitsui Holdigs ad 20% by Petroas Gas Berhad. The, this research aalyse the movemet of share price, startig from the first moth util more tha 50 moths. The data are collected from Datastream (Thomso Reuters). The, this research calculates two methods of forecastig. The first method is simple movig average ad the secod method is expoetial smoothig predictio method. The calculatio for simple movig average is as follows: demad i previous periods Movig average = (1) where is the umber of periods i the movig average. I this research, =3 moths is selected. Next, the calculatio for expoetial smoothig is as follows: New forecast = (Last period's actual demad) +(1- )(Last period's forecast) ( A ) (1 )( F ) t1 t1 (2) where is the smoothig costat. I this research, is set tothis settig is to make this forecastig method more resposive to chages because last period s actual demad are set to be more heavily weighted. Next, overall accuracy of the forecastig method eeds to validate usig robustess diagostic of error. The forecast error ca be determied by comparig the forecasted values with the actual or observed values. If F t deotes the forecast i period t, ad A t deotes the actual value i period t, the forecast error is defied as: Forecast error = Actual value - Forecast value (3) At Ft The, to validate the robustess diagostic of forecastig method, three types of error is itroduced. The first measure of the overall forecast error for a model is the mea absolute deviatio (MAD). This value is calculated by takig sum of the absolute values of the idividual forecast errors ad dividig by the umber of periods of data (): Forecast error MAD = = t1 t1 Actual-Forecast At Ft t 1 Next, the secod parameter for measurig overall forecast error is mea squared error (MSE). The MSE is average of squared differeces betwee the forecasted ad observed values. The formula for MSE is: (4) MSE = Forecast error Actual - Forecast t1 t1 t 1 A F t t (5) The, the third parameter for measurig forecast error is mea absolute percetage error (MAPE). The MAPE is computed as the average of the absolute differece betwee the forecasted ad actual values, expressed as a percetage of the actual values. The MAPE is calculated usig ext equatio: 40

4 Absolute percetage error (%) Share price (MYR) Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016, Page Forecast error / Actual 100 Actual Forecast / Actual MAPE = = t t t t t1 t1 100 At F t / At t 1 As robustess for diagostic error checkig, three method of error calculatio is compared to fid the lowest error for forecastig methods. I this paper, the accuracy betwee simple movig average ad expoetial smoothig are evaluated. RESULT AND DISCUSSION Figure 1 is the share price characteristics for Sapura Kecaa Petroleum Berhad. Figure 1(a) shows the expoetial smoothig predictio lie is located to the real data of share price. The, Figure 1(b) shows the absolute percetage error for period 4 th moth (August 2012) util 54 th moth (October 2016).It is cocluded that expoetial smoothig predictio method shows lower value of absolute percetage error. From Figure 1(c) the result shows Expoetial smoothig predictio is more accurate tha movig average. (6) 6 5 Real data value Movig average predictio Expoetial smooothig predictio Period (moth) (a) 70 Movig average predictio 60 Expoetial smoothig predictio Period (moth) (b) 41

5 Absolute percetage error (%) Share price (MYR) Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016, Page Error evaluatio Movig average Expoetial smoothig Mea absolute deviatio (MAD) Mea squared error (MSE) Mea absolute percetage error (MAPE) (c) Figure 1: Share price for Sapura Kecaa Petroleum Berhad (a) Real dyamic movemet of share price (b) Absolute percetage error aalysis (c) Evaluatio for three types of error Figure 2 is the share price characteristics for Gas Malaysia Berhad. Figure 2(a) shows the expoetial smoothig predictio lie is located to the real data of share price. The, Figure 2(b) shows the absolute percetage error for period 4 th moth (September 2012) util 53 th moth (October 2016).It is cocluded that expoetial smoothig predictio method shows lower value of absolute percetage error. From Figure 1(c) the result shows Expoetial smoothig predictio is more accurate tha movig average. 6 5 Real data value Movig average predictio Expoetial smooothig predictio Period (moth) (a) 70 Movig average predictio 60 Expoetial smoothig predictio Period (moth) (b) 42

6 Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016, Page Error evaluatio Movig average Expoetial smoothig Mea absolute deviatio (MAD) Mea squared error (MSE) Mea absolute percetage error (MAPE) (c) Figure 2: Share price for Gas Malaysia Berhad (a) Real dyamic movemet of share price (b) Absolute percetage error aalysis (c) Evaluatio for three types of error CONCLUSION The objective of this research is to evaluate the forecastig method to predict the log term performace of share price. The share prices that ivolved i this research are sharia-compliat compaies that listed i Malaysia Stock Exchage i year of We select two compaies that related with oil ad gas sector. The compaies are Sapura Kecaa Petroleum Berhad ad Gas Malaysia Berhad. I this research, we aalyzed the implemetatio of two methods of forecastig which are simple movig average ad expoetial smoothig. From the result i Figure 1 util Figure 2, this research cocludes that: (1) The value of share price is dyamically movig fluctuate accordig to market coditio. Both of the graph show large decremet of value startig from year of 2015 to (2) The evaluatio of each forecastig method is evaluate thoroughly with respect to three measure of error calculatio, which are mea absolute deviatio (MAD), mea squared error (MSE) ad mea absolute percetage error (MAPE). (3) The error value for each calculatio is bigger if the volatility of error for the share price is higher. (4) The forecastig method of expoetial smoothig is better tha simple movig average because of it is less error. Therefore, expoetial smoothig is more accurate i forecastig the dyamic behavior of share price. REFERENCES Abdul Rahim, R., & Yog, O. (2010). Iitial returs of Malaysia IPOs ad Shari a-compliat status. Joural of Islamic Accoutig ad Busiess Research, 1(1), Abu Bakar, N. ad Rosbi, S. (2016). Log Term Performace of Islamic Share Price for Iitial Public Offerigs (IPOs) i Malaysia: Evidece from Sharia-Compliat Compaies Listed o the Malaysia Stock Exchage ( ). Iteratioal Joural of Maagemet Sciece ad Busiess Admiistratio, 2(4), Ahmad Zaluki, N. A, Campbell, K. ad Goodacre, A. (2007). The Log Ru Share Price Performace of Malaysia Iitial Public Offerigs (IPOs). Joural of Busiess ad Accoutig, 34(1), Astuty, W. (2015). The Extraordiary Solutio for Idoesia Ecoomic Crisis: Shariah Capital Market. Joural of Fiace ad Bak Maagemet, 3(2), Boulto, T. J., Smart, S. B., & Zutter, C. J. (2010). IPO Uderpricig ad Iteratioal Corporate Goverace. Joural of Iteratioal Busiess Studies, 41(2), Bessler, W. ad Thies (2007). The log-ru performace of iitial public offerigs i Germay. Maagerial Fiace, 33(6), Carter, R.B., Dark F. H., ad Sigh, A.K. (1998). Uderwriter Reputatio, Iitial Retur ad Log Ru Performace of IPO stocks. The Joural of Fiace, 53(1), Cha, K., Wag, J. ad Wei K.C.J. (2004). Uderpricig ad log term performace of IPOs i Chia. Joural of Applied Corporate Fiace, 10(3), Che, A. Che, L.W. ad Kao, L (2010). Leverage, liquidity ad IPO log ru performace: evidece from Taiwa IPO markets. Iteratioal Joural of Accoutig & Iformatio Maagemet, 18(1), Corhay, A., Teo, S. ad Rad, A.T. (2002). The log ru performace of Malaysia iitial public offerigs (IPO): value ad growth effects. Maagerial Fiace, 28(2), Drobetz, W., Kammerma, M. ad Walchle, U. (2005). Lo ru performace of Iitial Public Offerigs: The evidece for Switzerlad. Schmalebach Busiess Review, 57, Farid, D., Meybodi, A.R. ad Mirfakhraddiy, S.H. (2010). Ivestmet risk maagemet i Tehra Stock Exchage (TSE) usig techique of Mote Carlo Simulatio (MCS), Joural of Fiacial Crime, 17(2), Goerge, M. Khurshed, A ad Mudambi, R. (2007). The log ru performace of UK: ca it be predicted. Maagerial Fiace, 33(6),

7 Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016, Page How, J., Jelic, R., Saadoui, B., & Verhoeve, P. (2007). Share allocatios ad performace of KLSE secod board IPOs. Pacific-Basi Fiace Joural, 15(3), Iqbal, Z. (1999). Fiacial Egieerig i Islamic Fiace, Thuderbird Iteratioal Busiess Review, 41(4), Lee, P.J, Taylor, S.L. ad Walter, T.S. (1996). Australia IPO pricig i the short ad log ru, Joural of Bakig ad Fiace, 20, Kluger, B.D ad McBride, M, E. (2011). Itraday tradig patters i a itelliget autoomous aget-based stock market, Joural of Ecoomic Behavior & Orgaizatio, 79, Kirkulak, B., ad Davis, C. (2005). Uderwriter Reputatio ad Uderpricig: Evidece from the Japaese IPO Market. Pacific-Basi Fiace Joural, 13, Kim, J., Krisky, I., ad Lee, J. (1995). The aftermarket performace of iitial public offerigs i Korea, Pacific Basi Fiace Joural, 3, Loughra, T, Ritter, J.R., Rydqvist, K. (1994). Iitial Public Offerigs: Iteratioal Isights. Pacific Basi Fiacial Joural, 2, Pavlov, V ad Hur, S. (2012). Testig the profitability of movig-average rules as a portfolio selectio strategy, Pacific-Basi Fiace Joural, 20, Paudyal, K., Saadoui. B. ad Bristo, R.J. (1998). Privatisatio Iitial Public Offerig i Malaysia: Iitial Premium ad Log Term Performace, Pacific-Basi Fiace Joural, 6(5), Paul, S.K. (2011). Determiatio of Expoetial Smoothig Costat To Miimize Mea Square Error ad Mea Absolute Deviatio, Global Joural of Research i Egieerig, 11 (3), Ritter, J.R. (1991). The Log Ru Performace of Iitial Public offerigs, Joural of Fiace, 46(1), 3 27 Taylor, J.W. (2004). Volatility forecastig with smooth trasitio expoetial smoothig, Iteratioal Joural of Forecastig, 20, Welch, I ad Ritter, J. (2002). A Review of IPO Activity, Pricig ad Allocatios, Yale ICF Workig Paper, No

Error diagnostic for weighted moving average to forecast Shariacompliant securities in Malaysian Stock Exchange

Error diagnostic for weighted moving average to forecast Shariacompliant securities in Malaysian Stock Exchange Iteratioal Academic Research Joural of Busiess ad Techology 2(2) 2016 Page 29-37 Error diagostic for weighted movig average to forecast Shariacompliat securities i Malaysia Stock Exchage Nashirah Biti