Investor sentiment and shari’ah-compliant asset pricing model in Indonesia / Igo Febrianto

This study investigates the emerging field of Islamic finance through the lens of a Shari’ah-Compliant Asset Pricing Model (SCAPM) that incorporates the principles of Maqasid al-Shari’ah. By redefining the conventional risk-free rate based on necessities (daruriyyat) and integrating the investor sentiment risk rooted in the concept of nafs in Islam derived from Maqasid al-Shari’ah, the study aims to enhance the SCAPM framework within the Islamic financial paradigm. The development of a framework grounded in Islamic principles, such as Maqasid al-Shari’ah, is expected to provide a foundation for Islamic financial stakeholders to further develop Islamic financial models. The research focuses on the Indonesian Stock Exchange, examining the complex interplay between the market risk premium, investor sentiment, and market conditions. The empirical investigation employs a Panel Autoregressive Distributed Lag (Panel ARDL) analysis. This approach allows for the estimation of both short-run and long-run correlations, aligning with the dynamic nature of financial markets. The dataset includes 109 Shari’ah-compliant entities listed over a period of 164 months from October 2007 to June 2021. The findings indicate that in the long-run, the Islamic market risk premium and investor sentiment positively affect Shari’ah-compliant stock returns. Interestingly, in the short term, the market risk premium exhibits a negative impact on these returns, while investor sentiment continues to have a positive influence. The role of moderating market conditions in the relationship between investor sentiment and Shari’ah-compliant stocks is only observed in the short term. The study further enriches and unravels sector-specific nuances within the framework by testing the SCAPM in industrial sectors such as Agriculture, Basic Industry and Chemicals, Consumer Goods, Infrastructure and Utilities, Mining, Miscellaneous, Property and Real Estate, and Trade, Service, and Investment. In industry-specific testing, the market risk premium remains a significant variable affecting Shari’ah-compliant stock returns. However, the results of investor sentiment, measured by direct, indirect measurements and sentiment index, vary from one industry to another. This suggests that an industry-specific analysis should be considered when evaluating market risk premium and investor sentiment as risk factors for investing in Shari’ah-compliant stocks. By integrating the Islamic ground principle of Maqasid al Shari'ah into the SCAPM framework, the research contributes to the theoretical underpinnings of Islamic finance and also provides empirical insights useful for investment decisions in Shari’ah-compliant markets. This study aims to promote the development of SCAPM using Maqasid al-Shari’ah and offer empirical evidence on market and investor risk factors. These findings can guide policymakers and researchers in fostering modern Islamic financial models grounded in Islamic principles.