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Risk-Reward Trade-Off and Volatility Performance of Islamic Versus Conventional Stock Indices: Global Evidence

Author

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  • Ahmad Abu-Alkheil

    (School of Management and Logistic Sciences, German Jordanian University Amman 11180, Jordan)

  • Walayet A. Khan

    (Schroeder Family School of Business Administration, University of Evansville 1800 Lincoln Avenue, Evansville, IN 47722, United States)

  • Bhavik Parikh

    (Gerald Schwartz School of Business, St. Francis Xavier University, Antigonish, Nova Scotia — B2G W5, Canada)

Abstract

In this paper, we compare the performance of Islamic stock indices (ISI) and conventional stock indices (CSI) from FTSE, DJ, MSCI, S&Ps and Jakarta series using common risk-return metrics. The sample consists of 64 ISI and CSI, and covers the period from 2002 to 2017. The majority of the stock indices are from the Pacific Rim countries’ stock markets. Additionally, we employ the GARCH-M model to examine the impact of past volatility on spot returns. Findings suggest that the ISI are less sensitive to the average market movements compared to the CSI, but surprisingly offer similar raw returns suggesting primary support for the low risk-high return paradox. On further examination, results reveal that M2, Omega, Sharpe and Treynor measures indicate that ISI underperform CSI while Jensen’s alpha and Sortino ratio put ISI ahead of CSI. Moreover, findings show that pre-crisis winners (CSI) were losers during the 2008 crisis but subsequently recovered and ended up with higher returns than ISI. Findings also show that the previous volatility of stock returns can be potentially used for predicting future returns.

Suggested Citation

  • 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.
    • Handle: RePEc:wsi:rpbfmp:v:23:y:2020:i:01:n:s0219091520500022
    DOI: 10.1142/S0219091520500022
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    Cited by:

    1. Sherif, Mohamed, 2020. "The impact of Coronavirus (COVID-19) outbreak on faith-based investments: An original analysis," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).

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