Capital Asset Pricing Model and Pricing of Islamic Financial Instruments

Abstract

The prohibitions of ribā (interest) and trading in non-ḥalāl businesses in Islam redefines investment universe assumed by Capital Asset Pricing Model (CAPM). In Islamic investment world, risk-free asset and market portfolio with non-ḥalāl constituents are irrelevant. We propose two-versions of Sharīʿah-compliant CAPM that use Sharīʿahcomplaint market portfolio and are free of risk-free asset. We test the proposed models together with conventional CAPM in Bursa Malaysia using three- and ten-year data. The test results of the models with three-year data reveal remarkable similarity between versions of Sharīʿah-compliant models. Besides, Sharīʿah-compliant CAPM is as capable of explaining returns on Sharīʿah-complaint stocks as conventional CAPM is of explaining returns on all stocks.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 32 citations exist upstream.