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Some preliminary evidence of price discovery in Islamic banks

Paresh Kumar Narayan, Susan Sunila Sharma, Kannan Sivananthan Thuraisamy and Joakim Westerlund

Pacific-Basin Finance Journal, 2018, vol. 52, issue C, 107-122

Abstract: In this paper using time-series data for a large number of Islamic bank stocks belonging to eight Islamic countries we test for evidence of price discovery. We find that in each of the eight countries there appears a bank that dominates the price discovery process. We then utilize this information on price discovery to form a portfolio of price discovery dominating bank stocks and compare its performance with portfolios of banks characterized by country and volatility. We show that buying a portfolio of price discovery dominant banks and selling most of the country-specific and volatility portfolios allow an investor to maximise profits or minimise loss. Our results are (a) robust to non-Islamic banks and to a larger sample of combined Islamic and non-Islamic banks, and (b) suggest that economic significance of price discovery is stronger for non-Islamic banks.

Keywords: Price discovery; Bank stocks; Islamic countries; Portfolio; Profits (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:pacfin:v:52:y:2018:i:c:p:107-122