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Is investing in Islamic stocks profitable? Evidence from the Dow Jones Islamic market indexes

Author

Listed:
  • Hooi Hooi Lean
  • Vinod Mishra
  • Russell Smyth

Abstract

We examine whether the market for Islamic stocks is efficient and whether Islamic indices perform better than the market benchmark, after adjusting for volatility. To test the Efficient Market Hypothesis (EMH) we apply a series of unit root tests, including unit root tests that accommodate structural breaks and heteroskedasticity, to the Dow Jones Islamic Market Index (DJIMI) family of Islamic indices and the Dow Jones Industrial Average (DJIA), which we use as the market benchmark. We find that the EMH is supported for most of the Islamic indices. However, depending on the decision rule for choosing between unit root tests, between one and five Islamic indices were found to be mean reverting. We also find that the EMH is supported for the market benchmark. Based on the annualised Sharpe ratio for Islamic indices, we conclude that Islamic indices do not outperform the market benchmark after adjusting for risk. The one proviso to this conclusion is when the market as a whole is in a large downswing, we find that some Sharia compliant stocks do outperform the market as a whole. Finally, we implement a contrarian trading strategy, for trading horizons at one, three, six and 12 months and find that mean- reverting stocks outperform non-mean reverting stocks for trading horizons of three months or higher.

Suggested Citation

  • Hooi Hooi Lean & Vinod Mishra & Russell Smyth, 2015. "Is investing in Islamic stocks profitable? Evidence from the Dow Jones Islamic market indexes," Monash Economics Working Papers 33-15, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2015-33
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2015/3315islamicleanmishrasmyth.pdf
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    References listed on IDEAS

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    Cited by:

    1. Mohammad Imdadul Haque & Afsal Ellath Meethal, 2020. "Volatility and Information Behavior: A Study on Shariah Index and General Index حدة التقلب والاستجابة للمعلومات: دراسة مقارنة بين المؤشر الإسلامي والمؤشر التقليدي," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 33(1), pages 21-33, January.

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    Keywords

    Islamic stocks; structural breaks; heteroskedasticity; efficient market;
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