Asset pricing in an Islamic economy

Yacine Hammami

Applied Economics, 2020, vol. 52, issue 29, 3106-3122

Abstract: We define an Islamic economy as one with borrowing restrictions, no leverage, and no risk-free asset. We derive a consumption-based asset pricing model for this economy under standard preferences. We demonstrate that news to consumption growth is the main driver of Islamic financial markets, but the degree of borrowing constraints also affects the pricing of Islamic assets. Using Saudi Arabian data, simulations show that our model does a good job in matching the observed equity premium as well as the volatility of the market return. Our model implies that the price-dividend ratio predicts dividend growth, and as a result that prices are driven mainly by cash-flow news rather than by discount rate news. Empirical tests show that our model is consistent with the data.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2019.1706715 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:52:y:2020:i:29:p:3106-3122

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2019.1706715

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().