Portfolio Performance of Islamic Versus Conventional Market Indices and Regime Shift Behavior: Empirical Evidence from Asian Emerging Markets

Abstract

Purpose: The main objective of this study is to examine the performance analysis of Islamic and conventional portfolio of emerging market of Asia and to investigate whether Islamic indices outperform the conventional indices or not. Moreover, to investigate the regime shift behavior of these markets.
 Design/Methodology/Approach: Emerging markets of Asia like China, India, Indonesia, Malaysia, Pakistan and Thailand are taken. Data is taken for the period January 2010 to December 2019. Data frequency is on monthly closing prices basis for both markets. Risk adjusted measures like Sharpe ratio, Treynor ratio and Jensen alpha are used for performance evaluation. Markov switching model is used to investigate the performance of both indices. Morgan Stanley capital international risk- free rate is used as risk proxy.
 Findings: Sharpe ratio is outperformed in Islamic markets while Treynor ratio is outperformed in conventional markets. Jensen alpha is outperformed in Islamic market so result proved that mostly Islamic markets is outperformed. The Markov switching model divide the MSCI returns into two parts recession and expansion. Results indicated that the presence of regime in both recession and expansion period so investor can diversify the international portfolios. Mix portfolio strategy is indicated that investor behavior is indifferent. There is a change in both regime in recession and expansion period so investor consider the international portfolio diversification with regime shifts.
 Implications/Originality/Value: This study is important for global investor as well as local investor for portfolio diversification. This study is also important for academic scholars, Regulatory authorities and for those who is interested in Islamic funds by their religious views.