Using regime-switching models in Sharia-compliant stocks: performance assessment of investors with discriminated risk-appetite

• Published in: Nankai business review international Vol. 12; no. 4; pp. 599 - 617
• Main Authors: Saleem, Hassan Mujtaba Nawaz, Ahmad-Zaluki, Nurwati A
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Publishing Limited 01.11.2021; Emerald Group Publishing Limited
• Subjects: Asset allocation; Behavior; Behavioral economics; Capital markets; Disasters; Diversification; Emerging markets; Investments; Investors; New stock market listings; Optimization; Policy implementation; Policy making; Portfolio performance; Portfolios; Prices; Rationality; Regulation; Risk assessment; Risk aversion; Risk premiums; Securities markets; Stock exchanges; Stocks; Uniqueness; Volatility; Wealth; Pakistan; Portfolio optimization; Risk-appetite discriminated investor; compliant stock; Regime-switching models; Performance assessment; Automobile assembler
• ISSN: 2040-8749; 2040-8757
• DOI: 10.1108/NBRI-04-2020-0018

Purpose The paper aims to assess the performance of investors that are discriminated based on their risk-appetite who intend to invest in listed Sharia-compliant (SC) stocks to maximize their portfolios’ wealth through two different models (i.e. regime-switching [RS] and non-RS). Design/methodology/approach Study period (i.e. November 18, 2015–May 31, 2019), well described in two distinct volatility-related bull-regime and bear-regime, is divided into in-sample and out-sample where Rs. 1.00 is invested on the out-sample start date. Each investor’s cumulated wealth forecasted through different models is checked daily throughout the out-sample period, and then, analyzed based on investors’ cumulated ending wealth, and Sharpe ratio (SR) is obtained through different models. Findings The ending wealth of risk-averse and risk-neutral investors obtained through RS-models increased 5.27 times while that of risk-taker investors increased 5.13 times. However, ending wealth obtained through non-RS models remained far low. The SR remained unchanged among investors. However, the SR of RS models (i.e. 1.0867) is higher than that of non-RS models (i.e. 0.8681). Overall, RS model-based investments outperformed in all categories of investors. Practical implications The study helps the investor during the process of portfolio diversification in their asset(s) selection and limited capital apportionment decisions. It also helps market regulators in formulating regulations and the policymakers in articulating/implementing policies that may protect the stakeholders form consequent disasters, particularly when market switches regimes. Originality/value The uniqueness stems from its focus on risk-appetite discriminated investors’ portfolio wealth maximization issue examined through technical analysis using two completely distinct models in the emerging market’s listed SC stocks.