Capital Asset Pricing Model and Pricing of  Islamic Financial Instruments

Hakim, Shabir Ahmad; Hamid, Zarinah; Meera, Ahamed Kameel Mydin

doi:10.4197/islec.29-1.2

Cited by 17 publications

(15 citation statements)

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“…A few researchers have agreed that CAPM can be applied in Islamic finance [see Selim (2008), Hakim et al (2016), Febrianto and Rachman (2016), Hammami and Oueslati (2017), and the references therein]. One of the variables in CAPM requires the existence of a risk-free interest rate, also known as a risk-free return.…”

Section: Introductionmentioning

confidence: 99%

Mathematical modelling of a shariah-compliant capital asset pricing model

Hazny

Hasim

Yusof

2020

JIABR

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Purpose The capital asset pricing model (CAPM) is the most widely used asset pricing model that measures risk–return relationship. The CAPM is based on Markowitz’s mean variance analysis. The advancement of Islamic finance leads to the question whether or not the practice of modern investment theories and analyses such as the Markowitz’s mean variance analysis and CAPM are in accordance to shariah and could be used in pricing Islamic financial assets. Therefore, this paper aims to present a review of the CAPM and to discourse the set of assumptions underlying the model in terms of shariah compliance. Design/methodology/approach Although most of the assumptions are not contradictory to shariah principles, there are Islamic variables such as prohibition of short selling, purification and zakat that should be taken into consideration when pricing Islamic financial assets. We then develop a mathematical model which is a modification of the traditional CAPM that incorporates principles of Islamic finance and integrating zakat, purification of return and exclusion of short sales. Findings As a proof-of-concept, this paper presents the results of an empirical study on the proposed shariah-compliant CAPM in comparison to the traditional CAPM. The results show that the proposed Islamic CAPM is appropriate and applicable in examining the relationship between risk and return in the Islamic stock market. Originality/value This study contributes to existing body of knowledge by presenting an algorithm and mathematical derivation of the shariah-compliant CAPM which has been lacking in the literature of Islamic finance. The paper offers a novel approach in pricing Islamic financial assets in accordance to shariah, advocated by modern investment theories of Markowitz’s mean variance analysis and CAPM.

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Section: Introductionmentioning

confidence: 99%

Mathematical modelling of a shariah-compliant capital asset pricing model

Hazny

Hasim

Yusof

2020

JIABR

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“…Under the conventional financial system, much work has been done in the area of asset pricing [e.g., Capital Asset Pricing Model (CAPM) and APT/Multifactor models]. In case of Islamic finance, individual efforts to propose an asset pricing model for valuation of Islamic securities have been done, primarily focusing on CAPM (e.g., El-Ashkar, 1995;Hakim, Hamid, Meera, & Kameel, 2016;Hanif, 2011;Hanif, Iqbal, & Shah, 2016;Shaikh, 2010;Tomkins & Karim, 1987). Few studies have covered selected Islamic capital markets through the application of conventional models (e.g., Hakim & Rashidian, 2004;Hassan & Girard, 2010;Hassan, Khan, & Ngow, 2010;Hussin, Muhammad, Abu, & Awang, 2012;Majid & Yusof, 2009;Rana & Akhter, 2015;Yusof, Majid, & Shabri, 2007).…”

Section: Introductionmentioning

confidence: 99%

Causality among Stock Market and Macroeconomic Factors: A Comparison of Conventional and Islamic Stocks

Hanif

Bhatti

2018

J. Islam. bus. manag.

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A recent development in financial markets is the creation of Sharī'ah compliant stock universes. Sharī'ah compliant stock universe is featured as socially responsible investments, less levered, and more reflective of the real sector. This study is conducted to understand and document the short-run equilibrium among important macroeconomic indicators and Equity indexesIslamic and conventionalin the post-Sharī'ah-screening era in Pakistan. Comparative study of linkages among stock indexes and macroeconomic variables is of great interest to i) identify the important macroeconomic factors; and ii) document whether Sharī'ah screening of stocks has created any difference (in macro risk factors). We have included eight macroeconomic variables to study integration with stocks for 64 Months' period (07/2011-10/2016). Evidence has been obtained by application of correlation, unit root, OLS-regression and Granger causality tests. Findings suggest that both markets Islamic & conventional are integrated with selected macroeconomic indicators. However, evidence lacks the integration of markets themselves. We identify a set of two variables from real economy exports and workers' remittances-linked with both markets, while the third variable is different for Islamic (industrial production) and conventional (Money Supply (MS)) markets. Important monetary variables interest rate and inflation have shown an insignificant association. Movements of Islamic index are in-line with the theory i.e., disassociation from interest and reflection of the real economy. Movements of conventional index cover both real and monetary sectors.

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“…A few researchers have agreed that Capital Asset Pricing Model can be applied in Islamic finance (Selim, 2008;Hakim et al, 2016). One of the variables in CAPM requires the presence of a risk-free interest rate which known as risk-free return.…”

Section: Introductionmentioning

confidence: 99%

Shariah-compliant Capital Asset Pricing Model: new mathematical modeling

2017

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The main objective of our paper is to propose a novel approach in pricing Islamic financial assets in accordance to shariah, advocated by contemporary investment theories of Markowitz's Mean-Variance Analysis and CAPM. The shariah-compliant Capital Asset Pricing Model that we developed with a few changing's of the traditional Capital Asset Pricing Model is integrating zakat, purification of return and exclusion of short sales. Then, we utilize a sample composed of 10 shariah-compliant public listed companies in Bursa Malaysia. The empirical results find that the proposed Islamic CAPM is appropriate and applicable in investigating the linkage amongst risk and return in the Islamic stock market. Our investigation contributes to existing body of knowledge by presenting an algorithm and mathematical modelling of the shariah-compliant CAPM which has been lacking in the literature of Islamic finance.

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Capital Asset Pricing Model and Pricing of Islamic Financial Instruments

Cited by 17 publications

References 0 publications

Mathematical modelling of a shariah-compliant capital asset pricing model

Mathematical modelling of a shariah-compliant capital asset pricing model

Causality among Stock Market and Macroeconomic Factors: A Comparison of Conventional and Islamic Stocks

Shariah-compliant Capital Asset Pricing Model: new mathematical modeling

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