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Transition to Islamic equities: Systematic risk and Shari'ah compliance

Faruk Balli (), Md Iftekhar Hasan Chowdhury and Anne de Bruin

Global Finance Journal, 2022, vol. 51, issue C

Abstract: This study examines the systematic risk exposure of a sample of equities, domiciled in the United States that have transitioned to ethically screened, Shari'ah compliant, Islamic equities. The conjecture is that the anterior and posterior risk exposures will be different. Our empirical results indicate that Shari'ah compliance initially creates a shock in systematic risk, but transitional behaviors subsequently diverge. Particular screening ratios also behave similarly. In effect, the capital market reinforces the risk position and increases systematic risk. However, this is essentially a transition effect. Over the entire period, we find a downward trend in systematic risk. Shari'ah compliance makes the adopted equities less risky over the long-term with improved market information. Our results hold even after controlling the screening ratios and conducting a number of robustness checks.

Keywords: Islamic equity; Shari'ah compliance; Systematic risk (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.gfj.2020.100552

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