Islamic spot and index futures markets: Where is the price discovery?

Abstract

This paper examines the source of price discovery for Islamic stocks. We pair a large number of Islamic stocks to country-specific index futures and estimate price discovery using a vector error correction model. The results obtained using data for 19 countries suggest that for most countries (63% of the sample) price discovery is dominated by the spot market. We show that for these countries, a mean-variance investor makes annualized average profit of 4.91% compared to an average buy-and-hold profit of 2.97% per annum.

Machine Learning and Expert Judgement: Analyzing Emerging Topics in Accounting and Finance Research in the Asia–Pacific

“…For example, Karabiyik et al . (), Narayan et al . (), and Narayan () have begun to examine the price discovery process of Islamic stocks.…”

Islamic Banking and Finance: Beyond Comparison and Investment Opportunities

“…remains an important question in Islamic market research. In this special issue, two articles respectively by Karabiyik et al (2018) and Narayan et al (2018) focus on price discovery, the process by which new information is impounded into asset prices and consequently results in leading and lagging stocks (markets), and its investment implications. Meanwhile, Hutchinson et al (2018) cautions that existing findings on comparative performance of Islamic and conventional stocks have not properly considered the cost of Islamic purification.…”

“…Using data from 19 countries, Karabiyik et al (2018) assess interactions between Islamic spot and index futures markets by means of a panel vector error correction model to obtain the estimates of price discovery. Interestingly, in 12 out of the 19 markets, the price discovery is dominated by the spot market, which is in consonant with the trading volume hypothesis.…”

“…While Karabiyik et al (2018) and Narayan et al (2018) hint on profit opportunities from investing is Islamic stocks by utilizing information on price discovery, Hutchinson et al (2018) and Narayan (2010) seem to place caution on Islamic stock investments. Hutchinson et al (2018) in particular note that "conclusions about the performance of Shari'ah portfolios do so in errors" since they do not factor in the cost of Islamic purification.…”

Essays in financial asset pricing in the European Monetary Union

“…In their sector based analysis, they find that the stock market contributes most to price discovery in most of the sectors. The other exception is Karabiyik et al (2017). They investigate the source of price discovery for Islamic Stocks listed on future markets and on spot markets with the help of panel data analysis.…”