IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v28y2014icp175-189.html
   My bibliography  Save this article

Matching perception with the reality—Performance of Islamic equity investments

Author

Listed:
  • Ashraf, Dawood
  • Mohammad, Nazeeruddin

Abstract

The systematic failure of the global equity markets during the recent financial crisis made investors re-evaluate their portfolio constituents. It is argued that equities that comply with the Islamic investment principles perform better than conventional equities during the declining phase of capital markets. The better performance of Islamic investments can be attributed to the Shari'ah based screening criteria that specifically forbids investment in shares of those companies that are excessively leveraged and/or engaged in lending activities. This study investigates the extent to which this claim is valid by comparing the performance of global and regional Islamic equity indices (IEIs) with conventional equity indices during the past decade. The equity indices for such analysis are preferred since it does not account for transaction costs or management skills. A logistic smooth transition autoregressive (LSTAR) model is used to investigate whether the ‘down market’ performance of IEIs differs from conventional indices. The LSTAR is superior to conventional ordinary least squares models since this allows for a smooth transition from the ‘down market’ to the ‘up market’ rather than an abrupt change. The empirical results indicate that IEIs, in general, perform better than conventional indices during the period 2000 to 2012. We do not find any abnormal returns associated with Islamic equity indices on a global basis, however, there is evidence of positive abnormal returns in the case of regional indices from Europe and Asia. Overall, IEIs exhibit lower systematic risk as compared with their benchmark suggesting that any excess performance from Islamic investments stems from the systematic risk that each investment assumes with respect to their benchmark during the declining phase of capital markets. The findings of this study are of interest to both academics and the general investing public since it provides evidence that IEIs are comparatively less risky than their conventional counterpart and thus provide hedging opportunities during the downfall of capital markets.

Suggested Citation

  • Ashraf, Dawood & Mohammad, Nazeeruddin, 2014. "Matching perception with the reality—Performance of Islamic equity investments," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 175-189.
  • Handle: RePEc:eee:pacfin:v:28:y:2014:i:c:p:175-189
    DOI: 10.1016/j.pacfin.2013.12.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X13000930
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Woodward, George & Brooks, Robert, 2009. "Do realized betas exhibit up/down market tendencies?," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 511-519, June.
    2. De Santis, Giorgio & Gerard, Bruno, 1997. " International Asset Pricing and Portfolio Diversification with Time-Varying Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1881-1912, December.
    3. Gerard Caprio, 2009. "Financial Regulation in a Changing World: Lessons from the Recent Crisis," Center for Development Economics 2009-01, Department of Economics, Williams College.
    4. Lunde A. & Timmermann A., 2004. "Duration Dependence in Stock Prices: An Analysis of Bull and Bear Markets," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 253-273, July.
    5. Robert D. Brooks & Robert W. Faff & Michael D. McKenzie, 1998. "Time†Varying Beta Risk of Australian Industry Portfolios: A Comparison of Modelling Techniques," Australian Journal of Management, Australian School of Business, vol. 23(1), pages 1-22, June.
    6. Andreas G.F. Hoepner & Hussain G. Rammal & Michael Rezec, 2011. "Islamic mutual funds’ financial performance and international investment style: evidence from 20 countries," The European Journal of Finance, Taylor & Francis Journals, vol. 17(9-10), pages 829-850, November.
    7. Dawood Ashraf, 2013. "Performance evaluation of Islamic mutual funds relative to conventional funds: Empirical evidence from Saudi Arabia," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 6(2), pages 105-121, June.
    8. Dawood Ashraf & John Goddard, 2012. "Derivatives in the wake of disintermediation: a simultaneous equations model of commercial and industrial lending and the use of derivatives by US banks," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 4(3), pages 250-271.
    9. Hussein, Khaled A., 2004. "Ethical Investment: Empirical Evidence From Ftse Islamic Index," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 12, pages 22-40.
    10. Fikriyah Abdullah & Taufiq Hassan & Shamsher Mohamad, 2007. "Investigation of performance of Malaysian Islamic unit trust funds: Comparison with conventional unit trust funds," Managerial Finance, Emerald Group Publishing, vol. 33(2), pages 142-153, January.
    11. Saeed BinMahfouz & M. Kabir Hassan, 2013. "Sustainable and socially responsible investing: Does Islamic investing make a difference?," Humanomics: The International Journal of Systems and Ethics, Emerald Group Publishing, vol. 29(1), pages 164-186, August.
    12. Howton, Shelly W & Peterson, David R, 1998. "An Examination of Cross-Sectional Realized Stock Returns Using a Varying-Risk Beta Model," The Financial Review, Eastern Finance Association, vol. 33(3), pages 199-212, August.
    13. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    14. Pettengill, Glenn N. & Sundaram, Sridhar & Mathur, Ike, 1995. "The Conditional Relation between Beta and Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 101-116, March.
    15. Said M. Elfakhani & M. Kabir Hassan & Yusuf M. Sidani & Yusuf M. Sidani, 2007. "Islamic Mutual Funds," Chapters,in: Handbook of Islamic Banking, chapter 16 Edward Elgar Publishing.
    16. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    17. Jose Francisco Rubio & M. Kabir Hassan & Hesham Jamil Merdad, 2012. "Non-parametric performance measurement of international and Islamic mutual funds," Accounting Research Journal, Emerald Group Publishing, vol. 25(3), pages 208-226, November.
    18. Mohamed Albaity & Rubi Ahmad, 2008. "Performance of Syariah and Composite Indices: Evidence from Bursa Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 4(1), pages 23-43.
    19. Faff, Robert, 2001. "A Multivariate Test of a Dual-Beta CAPM: Australian Evidence," The Financial Review, Eastern Finance Association, vol. 36(4), pages 157-174, November.
    20. Hodoshima, Jiro & Garza-Gomez, Xavier & Kunimura, Michio, 2000. "Cross-sectional regression analysis of return and beta in Japan," Journal of Economics and Business, Elsevier, vol. 52(6), pages 515-533.
    21. Hayat, Raphie & Kraeussl, Roman, 2011. "Risk and return characteristics of Islamic equity funds," Emerging Markets Review, Elsevier, vol. 12(2), pages 189-203, June.
    22. Seng Kok & Gianluigi Giorgioni & Jason Laws, 2009. "Performance of Shariah-Compliant Indices in London and NY Stock Markets and their potential for diversification," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 2(3/4), pages 398-408.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Islamic equities; LSTAR; Dual beta; Equity markets; Systematic risk;

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:28:y:2014:i:c:p:175-189. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.