THE RELATIVE RISK PERFORMANCE OF ISLAMIC FINANCE: A NEW GUIDE TO LESS RISKY INVESTMENTS

Haitham A. Al-Zoubi () and Aktham I. Maghyereh ()
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Aktham I. Maghyereh: Department of Economics and Finance, United Arab Emirates University, Al-Ain, United Arab Emirates

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 02, pages 235-249

Abstract: We examine the relative risk performance of the Dow Jones Islamic Index (DJIS) and find that the index outperforms the Dow Jones (DJIM) WORLD Index in terms of risk. Using the most recent Value-at-Risk (VaR) methodologies (RiskMetrics, Student-t APARCH, and skewed Student-t APARCH) on the 1996–2005 period, and assuming one-day holding period for both indices with a moving window of 500 day data, we show that the value of VaR is greater for DJIM WORLD than for DJIS Islamic. We interpret the results mainly to the profit-and-loss sharing principle of Islamic finance where banks share the profits and bear losses (Mudarabah) or share both profits and losses (Musharaka) with the firm.

Keywords: Islamic investment; profit-and-loss sharing; risk performance; Value-at-Risk (search for similar items in EconPapers)
Date: 2007

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