Abstract
PurposeThis study aims to investigate Malaysian stock market efficiency from the view of Sharīʿah-compliant and conventional stocks based on the effectiveness of technical trading strategies.Design/methodology/approachThis study uses unconventional trading strategies that mix buy recommendations of Bursa Malaysia analysts with sell signals generated from 10 selected technical trading strategies (simple moving average, moving average envelopes, Bollinger Bands, momentum, commodity channel index, relative strength index, stochastic, Williams percentage range, moving average convergence divergence oscillator and shooting star) that are detected using ChartNexus. The period from 1 January 2013 until 31 December 2015 produces a total sample consisting of 1,265 buy recommendations of 125 Sharīʿah-compliant stocks and 400 buy recommendations of conventional stocks. The study period is extended until 31 March 2016 to provide an ample time for detecting the sell signal especially for buy recommendations that are released towards the end of 2015.FindingsThe resulting Jensen’s alpha show 8 out of 10 strategies are effective in generating abnormal returns in Sharīʿah-compliant samples while only 3 out of 10 strategies are effective in conventional samples. Prominent effectiveness of technical trading strategies in Sharīʿah-compliant stocks implies clear inefficiency in that stock market segment as opposed to those of the conventional stocks.Originality/valueThe results based on unconventional trading strategies provide new insights of Malaysian stock market efficiency especially in Sharīʿah-compliant and conventional stocks. The paper provides more robust findings on market efficiency as firms’ equity level data were focussed together with analysts’ buy recommendations from Bursa Malaysia.
Highlights
The Islamic capital market (ICM) has shown tremendous growth in recent years, partially because of the increasing wealth of oil-exporting countries, in the Middle East where the population is predominantly Muslim
Instability of the conventional equity market has been acknowledged as one of the driving factors that has contributed towards the growth and development of the Islamic equity market as the latter is being more widely recognised as the alternative to the conventional equity market
To draw a distinction with the standard approach, which relies on technical strategies for making both buy and sell decisions, this study proposes that this approach be referred to as unconventional trading strategies to identify mixing analysts’ recommendations and technical trading strategies
Summary
The Islamic capital market (ICM) has shown tremendous growth in recent years, partially because of the increasing wealth of oil-exporting countries, in the Middle East where the population is predominantly Muslim. The widespread attention on ICM has attracted the interest and attention of many researchers in conducting studies to establish evidence on its viability and performance relative to its conventional counterparts In some cases, these studies have strongly argued that Muslim investors are prone to limited benefits associated with portfolio diversification given that the Sharīah screening process will reduce the number of component stock choices in the formulation of portfolios (Bauer et al, 2005; Hayat and Kraeussl, 2011). These studies have strongly argued that Muslim investors are prone to limited benefits associated with portfolio diversification given that the Sharīah screening process will reduce the number of component stock choices in the formulation of portfolios (Bauer et al, 2005; Hayat and Kraeussl, 2011) In support of this proposition, Ho et al (2014) reported that the size of the investment pools of Islamic indexes is marginally smaller compared to their conventional indexes. An exception is for the Indian Islamic equity markets, which show diversification benefits in both the short and long term
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