Abstract
The Dow Jones Islamic Market indices (DJIMI) are constructed by screening out stocks that are incompatible with Islam's prohibition of interest and certain lines of business. However, as a blunt instrument, the interest rate can affect discounted cash flows of any firm, even a firm with no financial leverage. This study reveals that the aggregate portfolio of Islamic stocks is immune to interest rate risk. However, at the sectoral level some Islamic equity portfolios demonstrate exposure to interest rate risk. Overall, evidence of interest rate risk exposure is less pronounced among Islamic sector portfolios than that of their mainstream counterparts—the Dow Jones World sector indices. The results also hold when interest rate risk is assessed in terms of the sensitivity of the DJIMI return to changes in level, slope and curvature of the interest rate term structure.
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