Financial Evaluation of Stock Performance According to Kappa 1 and Kappa 2 Models (An Applied Study on a Sample of Private Banks in the Iraqi Stock Exchange)

Abstract

This study aims to evaluate the performance of selected private banks listed on the Iraq Stock Exchange using the Kappa performance measure, which represents a downside risk–adjusted performance model. The research is motivated by the limitations of traditional performance measures—such as standard deviation and the Sharpe ratio—which rely on total volatility and fail to distinguish between upside and downside risk. This limitation is particularly relevant in emerging markets like Iraq, where return distributions are often non-normal and characterized by asymmetric risk. The study is based on monthly return data for a sample of five private banks over a period of 24 months. Monthly returns, average returns, and the risk-free rate were calculated, followed by the estimation of the Lower Partial Moment (LPM) of the first and second orders. Based on these estimates, the Kappa-1 and Kappa-2 ratios were computed using the practical formulation proposed by Kaplan and Knowles (2004). The empirical results reveal noticeable variation in performance across the sampled banks. Some banks recorded positive Kappa values, indicating a stronger ability to compensate investors for downside risk, while others exhibited negative values, reflecting weak risk-adjusted performance. The findings demonstrate that the Kappa model provides a more flexible and realistic framework for evaluating stock performance compared to traditional risk-adjusted measures, particularly in markets characterized by high volatility and downside risk. The study concludes that incorporating downside risk measures such as Kappa can enhance investment decision-making and financial performance evaluation in the Iraqi stock market.