Cross section of stock returns onShari’ah-compliant stocks: evidence from Pakistan

Salman Ahmed Shaikh (), Mohd Adib Ismail, Abdul Ghafar Ismail, Shahida Shahimi and Muhammad Hakimi Mohd. Shafiai

International Journal of Islamic and Middle Eastern Finance and Management, 2019, vol. 12, issue 2, 282-302

Abstract: Purpose - This paper aims to study the cross section of expected returns onShari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models. Design/methodology/approach - To estimate cross section of expected returns ofShari’ah-compliant stocks, the study uses capital asset pricing model (CAPM), Fama-French three-factor model and Fama-French five-factor model. Data for the period 2001-2015 on 217 companies are used. For the market portfolio, PSX-100 and Dow Jones Islamic Index for Pakistan are used. Findings - The study could not find empirical support for CAPM usingLintner (1965),Blacket al.(1972) andFama and Macbeth (1973) approach. Nonetheless, the relation between beta and returns is positive in up-market and negative in down-market. The results of Fama-French three-factor and five-factor models suggest that size premium is positive and significant for explaining the cross section of stock returns of small size stocks, whereas value premium is positive and significant for explaining the cross section of returns of high value stocks. Practical implications - The results suggest that fund managers can useShari’ah-compliant stocks for portfolio diversification and for offering specialized investments given the positive market excess returns and the existence of size and value premium onShari’ah-compliant stocks. Originality/value - This is the first study onFama-French (2015) five-factor model for Islamic capital markets in Pakistan.

Keywords: CAPM; Islamic capital markets; Asset pricing; Factor models; Shari’ah-compliant stocks; G11; G12; G17 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-04-2017-0100

DOI: 10.1108/IMEFM-04-2017-0100

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