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Risk and return characteristics of Islamic equity funds

  • Hayat, Raphie
  • Kraeussl, Roman

Islamic equity funds (IEFs) differ fundamentally from conventional equity funds since Muslims are prohibited to invest in certain companies/sectors and pay or receive interest. This paper analyzes the risk and return characteristics of a sample of 145 IEFs over the period 2000 to 2009. Our results show that IEFs are underperformers compared to Islamic as well as to conventional equity benchmarks. This underperformance seems to have increased during the recent financial crisis. We also find that IEF managers are bad market timers. They try to time the market, but in doing so, reduce the return rather than increasing it. An important implication of our results is that Muslim investors might improve their performance by investing in index tracking funds or ETFs rather than to invest in individual IEFs.

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File URL: http://www.sciencedirect.com/science/article/B6W69-5281STW-1/2/31fd02fad75a902ba1e1d3489e39f525
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Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 12 (2011)
Issue (Month): 2 (June)
Pages: 189-203

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Handle: RePEc:eee:ememar:v:12:y:2011:i:2:p:189-203
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620356

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  1. Andrew Ang & Joseph Chen & Yuhang Xing, 2005. "Downside Risk," NBER Working Papers 11824, National Bureau of Economic Research, Inc.
  2. Andreas Jobst & Peter Kunzel & Paul Mills & Amadou Sy, 2008. "Islamic bond issuance: what sovereign debt managers need to know," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 1(4), pages 330-344, November.
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  4. Keith Cuthbertson & Dirk Nitzsche & Niall O'Sullivan, 2010. "The Market Timing Ability of UK Mutual Funds," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 270-289.
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  6. William Goetzmann & Jonathan Ingersoll & Zoran Ivkovich, 1998. "Monthly Measurement of Daily Timers," Yale School of Management Working Papers ysm88, Yale School of Management, revised 01 Oct 2000.
  7. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, 05.
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  9. Jiang, Wei, 2003. "A nonparametric test of market timing," Journal of Empirical Finance, Elsevier, vol. 10(4), pages 399-425, September.
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