Abstract
This study examines the relative importance of the Shariah-Compliant Dow Jones market indexes to capture the dynamic behavior of stock returns at economy and industry levels. The analysis indicates that ethical investment has only an insignificant influence on the performance of stock market returns for both the economy and industry levels. Further, alternative measures of investment performance including the Carhart and Habit Formation models have been used to examine the behavior of the Shariah-Compliant Dow Jones market indexes. The findings suggest a negative market timing ability with both Islamic and conventional indexes. While Islamic indexes are growth focused, conventional indexes are value focused. Further, when investigating the performance of Islamic and conventional Dow Jones indexes during the recent financial crisis, there is evidence supportive of Islamic indexes against conventional ones. For sector groupings, the results indicate that parameter estimates are not consistent, suggesting that Islamic indexes are sector oriented. These results are explained to be a consequence of less diversification in Islamic indexes, leading to higher risk in some sector groupings such as technology and consumption services
Highlights
The topic of Islamic Finance has received significant attention in the financial press, in particular during the recent global financial crisis
Since differences in investment performance may be explained by differences in systematic risk, size, and value factors, the study detailed in this current paper provides new evidence on the performance of faith-based ethical investments by estimating the risk-adjusted returns/performance using the universally accepted habit formation approach of Campbell and Cochrane (2000)
Whilst the financial performance of faith-based ethical (Islamic) and conventional investments is relatively close in the first sample, faith-based ethical (Islamic) indexes appear to outperform their peers during the financial crisis
Summary
The topic of Islamic Finance has received significant attention in the financial press, in particular during the recent global financial crisis. Its move from a merely banking-based industry into broader aspects of market-based instruments have made Islamic capital markets the most rapid growing sector in the Islamic finance industry, and they have witnessed unprecedented expansion over the last decades (Dewandarua et al, 2015). This expansion may be due to the large growth of the capital value of Muslim investors and their strong demand for Shariah-compliant investment avenues, which prohibits interest (riba), excessive risk-taking (gharar), or gambling (maysir), and concomitantly promotes risk-sharing, profit-sharing, and assetbacked financial transactions (Zaherand Hassan, 2001; El-Gamal, 2006; Iqbal and Mirakhor, 2011; Sherif and Shaairi, 2013). Several previous studies do not show a general consensus that ethically screened firms outperform their non-ethical screened counterparts (see, for example, Diltz, 1995; Guerard, 1997; Sauer, 1997; Kreander, Gray, Power and Sinclair, 2005; Charles et al, 2015)
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