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Don’t let the Greed catch you! Pleonexia rule applied to Pakistan stock exchange

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  • Shafique, Attayah
  • Ayub, Usman
  • Zakaria, Muhammad

Abstract

This paper presents a financial heuristic named as Pleonexia rule which is applied to Pakistan Stock Exchange. Pleonexia is a Greek word which means ‘Greed for wealth or material possession or Avaricious’. Applying Pleonexia rule to stock exchange, if investors experience upward movements in the market and they want to get higher returns then they must keep investing in the same stock portfolios with the same pace. There is no need to get impatient and overly avaricious and, in turn, alter the original investment strategy. This rule is developed by using performance measure, that is, Sharpe ratio. The rule is developed in two steps. In first step, probabilities are checked by forecasting. In second step, these probabilities are used for the development and testing of Pleonexia rule. The data for the empirical analysis is taken from Pakistan stock exchange on monthly basis from 2000–2018. The results show that there is no difference between estimated and actual values for all classes of stock portfolios as shown in the first step of methodology. Furthermore, this rule is applicable for all three classes of stock portfolios which are growth, risk and value. The findings show that investors have on average 86% chances of getting gains up to the benchmark but in future they may be able to beat the market, thereby also achieving the level of healthy appetite. These chances are quite optimistic for developing countries and investor need to vigilant and remember ‘Don’t let the Greed catch you’.

Suggested Citation

  • Shafique, Attayah & Ayub, Usman & Zakaria, Muhammad, 2019. "Don’t let the Greed catch you! Pleonexia rule applied to Pakistan stock exchange," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 524(C), pages 157-168.
  • Handle: RePEc:eee:phsmap:v:524:y:2019:i:c:p:157-168
    DOI: 10.1016/j.physa.2019.04.048
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    References listed on IDEAS

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    More about this item

    Keywords

    Sharpe ratio; Rule of thumb; Pleonexia rule; Performance measures;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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