Are Islamic equity indices more efficient than their conventional counterparts ? Evidence from major global index families
AbstractDespite the increasing attention to ethical investments, the empirical studies on Islamic indices are scarce. Our article aims to contribute to the empirical literature by exploring the efficiency of these indices and their potential for diversification in comparison with the conventional benchmarks. We explore the existence of diversification opportunities by studying whether indices are cointegrated or not. Then, the weak-form efficiency level is analyzed by testing the random walk hypothesis using variance ratio tests. Our sample includes Islamic and mainstream indices of four indices families; two Shariah-compliant indices among them some have not been studied before in the academic literature. Our results show that Islamic indices have the same level of (in)efficiency as conventional ones, the indices of MSCI and FTSE families are the less inefficient. In terms of cointegration analysis, Islamic indices of Dow Jones and S&P have no cointegrating relations with their respective benchmarks, which suggests the existence of long-run diversification opportunities.
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Bibliographic InfoPaper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-091.
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Date of creation: 02 2014
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Islamic finance; indices; diversification; cointegration; efficiency; variance ratios;
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