Combined Application of State Space in ARIMA Form Model and Monte Carlo Simulation Method to Forecast TEPIX Index

In this study, we estimated the parameters using the State Space model described in ARIMA form. We’ve also used the Monte Carlo Method for simulating the process in 10000 reputations. Then the estimated parameters and the Monte Carlo simulation method are used to forecast TEPIX index, including 739 observations as an in-sample data from 21th of January 2011 to 19th February 2014 and 59 observations from 20th February 2014 to 21th May 2014 as an out of sample data. Furthermore, For more investigation we’ve considered different horizons of forecasting, short-term (equal to 1 week), mid-term (equal to 1 month) and long term (equal to 3 month). The results showed that Tehran stock market data has enough efficiency to forecast them, and showed that the State Space in Form ARIMA model and the Monte Carlo simulation method can be used as a predictive algorithm for TEPIX index and other indices with similar nature.