Conventional and Islamic stock markets: what about financial performance?

Ben Rejeb, Aymen and Arfaoui, Mongi (2016): Conventional and Islamic stock markets: what about financial performance?

Abstract

The study aims to analyze the performance of both Islamic and conventional stock markets, particularly at normal time and during the Subprime crisis period. The performance has been assessed by reference to one of the most important financial concepts, extremely useful in investment selections, namely: the informational efficiency. For this purpose, we use a relevant methodology based on the time varying parameters model combined with a GARCH specification, Granger non-causal test and structural break points technique. Empirical results show that the weak efficiency hypothesis is relatively verified in both the Islamic and the conventional market systems, but it varies from one market to another depending on the specific characteristics of each one. Moreover, we conclude that Islamic markets are not fully immunized against effects of financial crises and strong financial fragilities. The results of the Granger non-causality test suggest that the Islamic stock markets have succeeded to relatively escape important part of the last Subprime crisis risky effects. This evidence may support investment in this brand of markets and therefore allows the strengthening of economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Informational efficiency; financial fragility; financial interdependence; Subprime crisis; Islamic stock markets; conventional stock markets
• Subjects: G - Financial Economics > G0 - General; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets

References

Abdullah, F., Hassan, T., Mohamed, S., 2007. Investigation of performance of Malaysian Islamic unit fund trusts, comparison with conventional unit fund trusts. Managerial Finance 33, 142-153.

Abul Basher, S., Nechi, S., Zhu, H., 2014. Dependence patterns across Gulf Arab stock markets: A copula approach. Journal of Multinational Financial Management 25-26, 30-50.

Albaity, M., Ahmad, R., 2008. Performance of Shariah and Composite indices: Evidence from Bursa Malaysia. Journal of Accounting and Finance 4, 23-43.

Arouri, M.H., Nguyen, D.K., 2010. Oil prices, stock markets and portfolio investment: Evidence from sector analysis in Europe over the last decade. Energy Policy 38, 4528-4539.

Arouri, M., Ben Ameur, H., Jawadi, N., Jawadi, F., Louhichi, W., 2013. Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations. Applied Economics 45, 3412-3420.

Atta, H., 2000. Ethical rewards: An examination of the effect of Islamic ethical screens on financial performance and of conditioning information on performance measures. Master of Science Dissertation, University of Durham.

Bai, J., Perron, P., 1998. Estimating and testing linear models with multiple structural changes. Econometrica 66, 47-68.

Bai, J., Perron, P., 2003. Computation and analysis of multiple structural change models. Journal of Applied Econometrics 18, 1-22.

Bai, J., Perron, P., 2006. Multiple structural change models: a simulation study. in D. Corbae, S.N. Durlauf, & B.E. Hansen (Eds.), Econometric theory and practice: frontiers of analysis and applied research, Cambridge: Cambridge University Press, 212-217.

Bensafta, K.M., Semedo, G., 2011. Chocs, chocs de volatilité et contagion entre les marchés boursiers : application d'un modèle ICSS-MGARCH. Revue Economique 62, 277-311.

Binmahfouz, S., Hassan, K., 2012. A comparative study between the investment characteristics of Islamic and socially responsible investment portfolios: Evidence from FTSE indices family. International Conference on Islamic Capital Markets, 19-20 June, Jakarta, Indonesia.

Bollerslev, T. 1986. Generalized Autoregressive Conditional Heteroscedasticity. Journal of Econometrics 31, 307-27.

Bollerslev, T., Wooldridge, J., 1992. Quasi-maximum likelihood estimations and inferences in dynamic models with time-varying covariance. Econometric Reviews 11, 143-172.

Boumediene, A., Caby, J., 2009. The stability of Islamic banks during the subprime crisis. SSRN working paper, 1524775.

Brack, E., 2007. Les défis soulevés par le développement de la banque islamique, Revue Banque 696, 41-44.

Charles, A., Darne, O., 2006. Large shocks and the September 11th terrorist attacks on international stock markets. Economic Modelling 23, 683-698.

Dewandaru, G., Ismath Bacha, O., M. Masih., A. M., Masih, R., 2015. Risk-return characteristics of Islamic equity indices: Multi-timescales analysis. Journal of Multinational Financial Management 29, 115-138.

Dimson, E., Moussavian, M., 1998. A brief history of market efficiency. European Financial Management 4, 91-103.

El khamlichi, A., Sannajust, A., Sarkar, H.K., 2014. Islamic equity indices: insight and comparison with conventional counterparts. Bankers, Markets and Investors 130, 69-80.

Engle, R.F., 1982. Autoregressive conditional heteroscedasticity with estimates of the variance of UK inflation. Econometrica 50, 987-1007.

Fama, E.F., 1970. Efficient capital markets: A review of theory and empirical work. Journal of Finance 25, 383-417.

Fama, E.F., 1998. Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics 49, 283-306.

Fontaine, P., Nguyen D.K., 2006. Stock market liberalization and informational efficiency in emerging markets: New consideration and tests. Bankers, Markets and Investors 84, 6-17.

Girard, E., Hassan, M.K., 2008. Is there a cost to faith-based investing: Evidence from FTSE Islamic indices? The Journal of Investing 17, 112-121.

Girard, E., Hassan, M.K., 2008. Is there a cost to faith-based investing: Evidence from FTSE Islamic indices? The Journal of Investing 17, 112-121.

Granger, C.W.J., 1969. Investigating causal relation by econometric and cross-sectional method. Econometrica 37, 424-438.

Guyot, A., 2011. Efficiency and dynamics of Islamic investment: Evidence of geopolitical Effects on Dow Jones Islamic Market indexes. Emerging Markets Finance and Trade 47, 24-45.

Hakim, S., Rashidian, M., 2002. Risk and return of Islamic stock market indexes. Working Paper. California State University.

Harvey, C.R., 1995. Predictable risk and returns in emerging markets. Review of Financial Studies 8, 773–816.

Hassan, M.K., 2004. Risk, return and volatility of faith-based investing: The case of Dow Jones Islamic Index. Paper in proceedings of the 5th Harvard University Forum on Islamic Finance, University of Harvard, USA.

Hayat, R., Kraussl, R., 2011. Risk and return characteristics of Islamic equity funds. Emerging Markets Review 12, 189-203.

Hong, H.G., Kacperczyk, M., 2009. The price of sin: the effects of social norms on markets. Journal of Financial Economics 93, 15-36.

Hussein, K., 2004. Ethical Investment: Empirical evidence from FTSE Islamic Index. Islamic Economic Studies 12, 21-40.

Hussein, K., Omran, M., 2005. Ethical Investment revisited: Evidence from Dow Jones Islamic indexes. The Journal of Investing 14, 105-124.

Jawadi, F., Jawadi, N., Louhichi, W., 2014. Conventional and Islamic stock price performance: An empirical investigation. International Economics 137, 73-87.

Kok, S., Giorgioni, G., Laws, J., 2009. Performance of Shariah compliant indices in London and NY stock markets and their potential for diversification. International Journal of Monetary Economics and Finance 2-3, 398-408.

Lim, K.P., Brooks, R.D., 2010. Why do emerging stock markets experience more persistent price deviations from a random walk over time? A country level analysis. Macroeconomic Dynamics 14, 3-41.

McKenzie, D., 2011, Islamic Finance, The City Uk Research Center.

Milly, M., Sultan, J., 2012. Portfolio diversification during financial crisis: Analysis of faith based investment strategies. In building bridges across the financial communities: The global financial crisis, social responsibility, and faith-based finance. Harvard Law School, Islamic finance project, 334-352.

Nguyen, D.K., 2008. Financial liberalization and emerging stock markets. Economics Series, Harmattan Edition, Paris, France.

Nikkinen, J., Omran, M.M., Sahlstrom, P., Aijo, J., 2008. Stock returns and volatility following the september 11 attacks: Evidence from 53 equity markets. International Review of Financial Analysis 17, 27-46.

Obaidullah, M., 2001. Ethics and efficiency in Islamic stock markets. International Journal of Islamic Financial Services 3, 1-10.

Ramlall, I., 2010. Has the US Subprime crisis accentuated volatility clustering and leverage effects in major international stock markets? International Research Journal of Finance and Economics 39, 157-185.

Zalewska-Mitura, A., Hall, S.G., 1999. Examining the first stages of market performance. A test for evolving market efficiency. Economics Letters 64, 1-12.