Original Research Article
Year: 2018 | Month: January | Volume: 5 | Issue: 1 | Pages: 43-49
Circular Model & Circular Indicator on Measuring Return & Risk of Hotel & Travel Sector of Sri Lankan Share Market
Wiriththamulle Gamage Samanthi Konarasinghe
Institute of Mathematics & Management, Sri Lanka
ABSTRACT
Share trading is an important part of the economy of a country. Share market investments are considered as high risk, high return investments. But investors are concerned about low risk, high return investments. Hence forecasting of risk and return is essential for share markets. The Capital Asset Pricing Model (CAPM) is the most commonly used model for forecasting share returns. Auto Regressive Integrated Moving Average Models (ARIMA) and Vector Auto Regression (VAR) models also were successful for the purpose. However; CAPM and VAR models were totally failed in Sri Lankan context. The standard deviation of returns and the beta coefficient of CAPM are the used measurements of risk of returns; but both methods are erroneous. Tourism industry is a fast growing industry in Sri Lanka. Therefore, investor attraction towards the industry has been increasing. This study was focused on forecasting risk and returns of individual companies in Hotel & Travel (H&T) sector of Sri Lankan share market and finding the stability of them in market performance. The ARIMA model and the Circular Model were tested on measuring returns; the Circular Indicator was used in measuring risk of returns and the Coefficient of Stability was used for finding the stability of market performance. Monthly returns for the period from year 1994 to 2016 were used for data analysis. Model validation was based on Residual plots, Auto correlograms of residuals, Anderson Darling test, Durbin- Watson test, Root Mean Square Error and Mean Absolute Deviation. The ARIMA model was successful on 67% of the companies while the Circular Model was successful in 80% of the companies. The forecasted values of ARIMA models did not follow the patterns of the actual returns, but the forecasted values of CM followed the actual returns. As such, it was concluded that the CM superior to ARIMA in forecasting returns. Risk of returns was measured by the Circular Indicator (CI) and the stability of market performance of a company is evaluated by the Coefficient of Stability (CoS). Investors are rational; their risk preferences are subjective. As such; a risk taker can make use the CI together with the forecasted return for investment decision; a risk averse investor’s choice could be in cooperated to CI. The CoS can be used to get the overall picture of the performance of individual companies.
Key words: Circular Model, Circular Indicator, Coefficient of Stability.
[PDF Full Text]