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Are Islamic equity indices more efficient than their conventional counterparts ? Evidence from major global index families

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Author Info

  • Abdelbari El Khamlichi
  • Kabir Sarkar Humayun
  • Mohamed Arouri
  • Frédéric Teulon

Abstract

Despite 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 Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-091.

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Length: Number of pages pages
Date of creation: 02 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-091

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Keywords: Islamic finance; indices; diversification; cointegration; efficiency; variance ratios;

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References

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  1. Stephen Fowler & C. Hope, 2007. "A Critical Review of Sustainable Business Indices and their Impact," Journal of Business Ethics, Springer, vol. 76(3), pages 243-252, December.
  2. Graham Smith & Hyun-Jung Ryoo, 2003. "Variance ratio tests of the random walk hypothesis for European emerging stock markets," The European Journal of Finance, Taylor & Francis Journals, vol. 9(3), pages 290-300.
  3. Hoque, Hafiz A.A.B. & Kim, Jae H. & Pyun, Chong Soo, 2007. "A comparison of variance ratio tests of random walk: A case of Asian emerging stock markets," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 488-502.
  4. Wright, Jonathan H, 2000. "Alternative Variance-Ratio Tests Using Ranks and Signs," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 1-9, January.
  5. Mohamed Albaity & Rubi Ahmad, 2008. "Performance of Syariah and Composite Indices: Evidence from Bursa Malaysia," Asian Academy of Management Journal of Accounting and Finance, Penerbit Universiti Sains Malaysia, vol. 4(1), pages 23-43.
  6. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  8. Derigs, Ulrich & Marzban, Shehab, 2009. "New strategies and a new paradigm for Shariah-compliant portfolio optimization," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1166-1176, June.
  9. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
  10. Andreas Jobst, 2007. "The Economics of Islamic Finance and Securitization," IMF Working Papers 07/117, International Monetary Fund.
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Cited by:
  1. Ibrahim Fatnassi & Habib Hasnaoui & Zied Ftiti, 2014. "The impact of bank capital on profitability and risk in GCC countries: Islamic vs. Conventional," Working Papers 2014-413, Department of Research, Ipag Business School.
  2. Hela Miniaoui & Hameedah Sayani & Anissa Chaibi, 2014. "The Impact of Financial Crisis on Islamic and Conventional Indices of the GCC Countries," Working Papers 2014-401, Department of Research, Ipag Business School.
  3. Abdelbari El Khamlichi & Odile Ferry & Kamel Laaradh, 2014. "The performance of Islamic vs. conventional equity indices: Sectoral evidence," Working Papers 2014-393, Department of Research, Ipag Business School.

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