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Performance of Islamic and conventional stock indices: empirical evidence from an emerging economy

Author

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  • Md Ejaz Rana

    (COMSATS Institute of Information Technology)

  • Waheed Akhter

    (COMSATS Institute of Information Technology)

Abstract

Background This study aims to investigate the extent to which the conditional volatilities of both Shari’ah compliant stock and conventional stock are related to those of interest rate and exchange rate in the emerging economy of Pakistan. Methods We used KMI 30 and KSE 100 indices for Islamic and conventional stock for the period of July 2008 to November 2013. We employed Generalized Autoregressive Conditional Heteroskedastic in the mean (GARCH-M) model. This framework relaxes constancy assumption of classical linear regression (CLRM) model and allows exchange rate and interest rate volatility to evolve over time. The GARCH-M framework also reveals results about risk-return trade-off in the context of both Islamic and conventional stock indices. Results The findings show positive and statistically significant effect of interest rate volatility on KSE-100, whereas KMI-30 remains unaffected by the same. Exchange rate volatility is found to be significant for both conventional and Islamic indices. The relationship of risk coefficient (γ) and stocks returns, as expected, is positive and statistically significant for both KMI-30 and KSE-100. This result is consistent with the theory of risk-return trade-off. The results of parametric t-test show significant difference between returns of both indices. This implies that Shari’ah compliant stock index (KMI-30) of Pakistan underperforms its conventional counterpart. Conclusion By using different performance measures (Sharp ratio, Jensen alpha, Treynor ratio), this study also investigates the hypothesis that Islamic stock index has inferior performance compared with unscreened conventional counterparts due to availability of a smaller investment universe, increased monitoring costs, and limited diversification.

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  • Md Ejaz Rana & Waheed Akhter, 2015. "Performance of Islamic and conventional stock indices: empirical evidence from an emerging economy," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 1(1), pages 1-17, December.
    • Handle: RePEc:spr:fininn:v:1:y:2015:i:1:d:10.1186_s40854-015-0016-3
    DOI: 10.1186/s40854-015-0016-3
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    2. Chin, Leong Choong & Sek, Siok Kun & Tan, Yee Theng, 2018. "A Sectorial Performance Analysis of Kuala Lumpur Stock Exchange (KLSE, Bursa Malaysia)," MPRA Paper 90148, University Library of Munich, Germany.
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    4. Tanzeem Hasnat, 2021. "Infrastructure Equity and Firm Performance in India," Millennial Asia, , vol. 12(1), pages 97-115, April.
    5. Ahmad Abu-Alkheil & Walayet A. Khan & Bhavik Parikh, 2020. "Risk-Reward Trade-Off and Volatility Performance of Islamic Versus Conventional Stock Indices: Global Evidence," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 23(01), pages 1-29, March.
    6. Paresh Kumar Narayan & Syed Aun R. Rizvi & Ali Sakti, 2022. "Did green debt instruments aid diversification during the COVID-19 pandemic?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-15, December.
    7. Audi, Marc & Sadiq, Azhar & Ali, Amjad, 2021. "Performance Evaluation of Islamic and Non-Islamic Equity and Bonds Indices: Evidence from selected Emerging and Developed Countries," MPRA Paper 109866, University Library of Munich, Germany.
    8. Shabeer Khan & Niaz Ahmed Bhutto & Uzair Abdullah Khan & Mohd Ziaur Rehman & Wadi B. Alonazi & Abdullah Ludeen, 2022. "Ṣukūk or Bond, Which Is More Sustainable during COVID-19? Global Evidence from the Wavelet Coherence Model," Sustainability, MDPI, vol. 14(17), pages 1-20, August.
    9. Haddad, Hedi Ben & Mezghani, Imed & Al Dohaiman, Mohammed, 2020. "Common shocks, common transmission mechanisms and time-varying connectedness among Dow Jones Islamic stock market indices and global risk factors," Economic Systems, Elsevier, vol. 44(2).

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