Risk and Return of Islamic and Conventional Indices

Mouna Boujelbène Abbes

71 citations0/0 files storedInternational Journal of Euro-Mediterranean Studies

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Islamic Finance and Banking Studies Financial Markets and Investment Strategies Financial Risk and Volatility Modeling

Abstract

This study examines the risk and the return characteristics of the Islamic market indices versus their conventional counterpart indices. For this purpose, a large international data of 35 indices combining developed, emerging and GCC markets over the period of Jun 2002 to April 2012 is used. The t test has been employed to investigate the mean returns difference between both types of indices. The results show that there is no significant difference in mean between Islamic and conventional indices except for Italy and Australia. The EGARCH estimation results reveal the presence of a leverage effect risk in all studied indices. The study of the risk adjusted performances of Islamic stock market indices versus their conventional counterpart indices using differences-in-Sharpe ratio test and the CAPM model show that in the entire period as well as in the crisis period there is no difference between performance the types of indices in risk adjusted return basis. Consequently, Muslim investors can pursue passive stock investments in conformity to their religious beliefs without sacrificing financial performance.

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References

1986Generalized autoregressive conditional heteroskedasticity 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1966Mutual Fund Performance 1993Measuring and Testing the Impact of News on Volatility 1982

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