Downside Risk Measures Incorporated in Islamic Capital Asset Pricing Model.

Ayub, Usman; Raza, Naveed; Mujtaba, Ghulam; Masih, Mansur; saleem, Usama; Shafique, Attayah

This study attempts to examine different risk measures and their combinations as the part of a suitable asset pricing model for Islamic stocks. We choose beta, coskewness, downside beta, and downside coskewness and their combinations in single- and two-factor asset pricing model settings. We selected 91 companies from PSX using monthly returns from 2000-2018. The double sorting procedure is adopted for robustness, and collinearity between beta/downside beta and its respective higher moments is addressed by orthogonalizing each variable with its counterpart. Results tend to indicate that the two-factor model comprising downside beta and downside coskewness-based model is the most suitable asset pricing model for Islamic stocks. The use of two risk measures in the Islamic asset pricing framework yields a better understanding of stock prices which can help assess the risk of Islamic stocks for an investment decision.

ISLAMIC finance; CAPITAL assets pricing model; DECISION making in investments; RISK assessment; RATE of return

COMSATS Journal of Islamic Finance (CJIF), 2022, Vol 7, Issue 2, p21

2519-707X

Academic Journal

10.26652/cjif.7202222