Is investing in Islamic stocks profitable? Evidence from the Dow Jones Islamic market indexes

Hooi Hooi Lean (), Vinod Mishra and Russell Smyth

No 33-15, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: We examine whether the market for Islamic stocks is efficient and whether Islamic indices perform better than the market benchmark, after adjusting for volatility. To test the Efficient Market Hypothesis (EMH) we apply a series of unit root tests, including unit root tests that accommodate structural breaks and heteroskedasticity, to the Dow Jones Islamic Market Index (DJIMI) family of Islamic indices and the Dow Jones Industrial Average (DJIA), which we use as the market benchmark. We find that the EMH is supported for most of the Islamic indices. However, depending on the decision rule for choosing between unit root tests, between one and five Islamic indices were found to be mean reverting. We also find that the EMH is supported for the market benchmark. Based on the annualised Sharpe ratio for Islamic indices, we conclude that Islamic indices do not outperform the market benchmark after adjusting for risk. The one proviso to this conclusion is when the market as a whole is in a large downswing, we find that some Sharia compliant stocks do outperform the market as a whole. Finally, we implement a contrarian trading strategy, for trading horizons at one, three, six and 12 months and find that mean- reverting stocks outperform non-mean reverting stocks for trading horizons of three months or higher.

Keywords: Islamic stocks; structural breaks; heteroskedasticity; efficient market (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015-05
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (1)

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