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Dissecting anomalies in Islamic stocks: Integrated or segmented pricing?

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  • Zaremba, Adam
  • Karathanasopoulos, Andreas
  • Maydybura, Alina
  • Czapkiewicz, Anna
  • Bagheri, Noushin

Abstract

Is asset pricing integrated across Islamic and non-Islamic stocks? To answer this question, we identify and replicate 167 equity anomalies from the finance literature in over 1500 stocks from the Middle East equity markets for years 1997–2017. To determine whether Islamic or market-wide factors better explain the cross-section of returns, we evaluate their performance with the CAPM (Sharpe, 1964), Fama and French (1993) three-factor model, Carhart (1997) four-factor model, and Fama and French (2015) five-factor model. Only 27 of the anomalies prove profitable. The five-factor model copes best with the cross-section of returns, confirming its superiority over other models. The Islamic factors better explain the cross-section of returns than the market-wide factors, pointing to at least a partial market segmentation. The results are verified by a batter of additional tests, including cross-sectional regressions, examination of one-way and two-way sorted portfolios, tests for monotonic relationships, and factor redundancy checks.

Suggested Citation

  • Zaremba, Adam & Karathanasopoulos, Andreas & Maydybura, Alina & Czapkiewicz, Anna & Bagheri, Noushin, 2020. "Dissecting anomalies in Islamic stocks: Integrated or segmented pricing?," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:pacfin:v:62:y:2020:i:c:s0927538x17305899
    DOI: 10.1016/j.pacfin.2018.05.006
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    More about this item

    Keywords

    Islamic finance; Shariah-compliant stocks; Asset pricing; Equity anomalies; Market integration; Cross-section of returns; Multifactor models;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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