Are Islamic risk factors blessings or curse for stock return? evidence from Malaysia based on dynamic GMM and quantile regression approaches

This paper is motivated by the heightened interest in investing in Islamic equities. The paper is the first attempt at analysing the Islamic-effect in a cross-sectional stock return framework to individual 141 Islamic and non- Islamic firms using the dynamic GMM and Quantile regression techniques and we believe this is the first paper that investigates the Islamic-effect in such a context. We combine a unique Malaysian data set of individual Islamic stocks (as opposed to aggregate stock indices) since 1997 with a new method where we apply Islamic business activity and financial ratio screens to the universe of Malaysian stocks. Results tend to indicate that there is no significant relationship between Malaysian Islamic firms and average stock returns. We extend our results by using a Quantile regression approach to show that the non-significant Islamic effect is, in fact, changing at different percentiles that affect the cross-sectional expected returns of Malaysian common stocks. Results tend to show that some focus variables like market value and book to market and control variable, oil price are not significant at different percentiles, and this result has important implications for the growing Islamic finance industry around the world.