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

Hassan Mujtaba Nawaz Saleem and Nurwati A. Ahmad-Zaluki

Nankai Business Review International, 2021, vol. 12, issue 4, 599-617

Abstract: Purpose - The paper aims to assess the performance of investors that are discriminated based on their risk-appetite who intend to invest in listedSharia-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.

Keywords: Regime-switching models; Performance assessment; Portfolio optimization; Automobile assembler; Risk-appetite discriminated investor; Sharia-compliant stock (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:nbripp:nbri-04-2020-0018

DOI: 10.1108/NBRI-04-2020-0018

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