Estimation of the impact of risk resources on Islamic capital market (Case study: Tehran Stock Exchange)

Considering that the relationship between risk and return in stock exchange and stock behavior versus risk factors has always been the subject of discussion in the financial field and investors attempt to recognize these risk factors and explore the effect of these factors on the stock return to preserve the value of their portfolio, which means that an investor tries to maximize the expected return of their investment portfolio for a given amount of portfolio risk, or to minimize risk for a given level of expected return. So, explaining the method of the Pettengill et al (1995) test of the conditional relationship between beta and returns for Capital Asset Pricing Model, this paper examines and analyzes the conditional relationship between risk and return in Iran by estimating the relationship between various sources of risk -- market risk, oil price risk, exchange rate risk, gold price risk, inflation risk, skewness, and kurtosis -- and the stock return in the Tehran Stock Exchange over the period 2005 to 2012 in up and down market on the stock return of active selected industries by using the two-step multifactor conditional model introduced by Pettengill et al. (1995).
The estimation approach in this study involves two steps. In the first step, we use a daily time series regression model to estimate the beta coefficients on the independent variables. In the second step, a pooled data set of stock returns and risk parameters are used to estimate random effects models of the relationship between risk factors and stock returns in the Tehran Stock Exchange.
 The methodology used in this paper is a multi-factor model which allows the impact of the risk factors to have asymmetric effects depending on whether returns for the respective risk factor are increasing or decreasing. We find significant conditional relationships between risk and return for all the risk factors considered.
     The results for the top ten industries show that most of risk factors have a significant conditional relationship with stock returns. Market risk has a significant positive relationship with stock returns in up market and a significant negative relationship in down market. Moreover, the findings of symmetry test for estimated coefficients in conditional models state that this relationship for all of these risk factors is asymmetrical in up and down markets. Finally, results indicate that there are conditional relationships between skewness and kurtosis with stock returns only in the up stock market.