Understanding the Risks in Faith-Based Equity Investments: A Markov Regime Switching Analysis

Understanding the risks associated with faith-based equity investments assumes greater significance in the wake of the COVID-19 pandemic, which has once again exposed the susceptibility of the financial space to shocks. We use the nonlinear Markov regime-switching model to capture the time-varying beta and idiosyncratic volatility of the US Islamic, US Catholic and Switzerland Islamic equity portfolios provided by Morgan Stanley Capital International (MSCI) using daily index returns data during July 2017 to July 2021. Further complementing the country-level evidence, we refer to the global ACWI Islamic index and World Catholic Values Custom Index. The evidence suggests that the US and Switzerland Islamic portfolio have lower systematic risks during the calm and crisis period. Further, the global Islamic portfolio has lower systematic risks during the calm and crisis period, which signifies the robustness of the evidence. The US and global Catholic portfolio does not exhibit the same risk characteristics.