Risk and ethical investment: Empirical evidence from Dow Jones Islamic indexes

Abstract

International audienceThis paper contributes to the literature on the impact of the Shari'ah filtering criteria on the risk of Dow Jones Islamic indexes relative to their conventional counterparts. We show that Islamic and conventional indexes are affected by the same extreme events which can bias the estimation of the risk, especially the period of the Global Financial Crisis of 2007-2008 and its aftermath which is characterized by a very high level of volatility. Then, we examine whether the Islamic indexes are more risky than the conventional indexes using different risk measures. We also analyzed the performance of both indexes from various risk-adjusted performance measures. Overall, the Islamic indexes seem to be more risky than their conventional counterparts as well as exhibit a higher performance on the full period (1996-2013). The sample period is further divided into low volatility period and high volatility period based on the detection of structural breaks in the volatility. The results also show that both indexes have been affected by variance changes. We show that most of the Islamic indexes have higher level of risk than the conventional indexes, whatever the sub-periods. Consequently, this finding means that the Islamic indexes are riskier than the non-Islamic indexes. We also find that in most cases the Islamic indexes either outperform the non-Islamic indexes or there is no significant difference in performance between both indexes. These findings can be explained as a consequence of less diversification in Islamic indexes, leading to higher concentration risk in some sectors, such as basic material, industrial and technology firms. Further, we also fin

Asymmetric Return and Volatility Transmission in Conventional and Islamic Equities

“…The bulk of the existing literature is focused on the comparative performance of Islamic and conventional financial assets [1][2][3][4][5][6][7][8] The issue of potential risk transmission between Islamic and conventional financial assets is relatively less explored. This paper contributes toward this strand of literature by analysing the risk transmission mechanism between Islamic and conventional equities.…”

Performance of Shari’ah based Investment: Evidence from Pakistani Listed Firms

“…They found that Islamic indices outperform the conventional counterparts. Moreover, Charles, Darne, and Pop (2015) provided evidence that conventional indices either under-performed Islamic indices or their performance is statistically indistinguishable. They linked this relatively better performance of Islamic indices with the lesser diversification in such indices.…”

The Effect of Implicit Market Barriers on Stock Trading and Liquidity

“…However, these studies give inconsistent empirical evidence of the relative risk-adjusted performance of Islamic equity investments, compared to conventional ones. For example, several studies report Islamic equities outperform conventional stocks in terms of both raw and risk-adjusted returns (Alam and Rajjaque (2010); Ashraf and Mohammad (2014); Canepa and Ibnrubbian (2014); Shamsuddin (2014); Charles et al (2015)). To the contrary, other studies find the risk-adjusted returns of Islamic equities are no different from conventional returns (Ahmad and Ibrahim (2002); Girard and Hassan (2008); Dharani and Natarajan (2011);Walkshausl and Lobe (2012)).…”