Islamic indices
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Comparative Analysis of Islamic and Conventional Stock Indices
Market Efficiency in Islamic vs. Conventional Indices
Efficiency Comparison
Research comparing the efficiency of Islamic and conventional stock indices reveals mixed results. A study examining the martingale difference hypothesis (MDH) and the random walk hypothesis (RWH) across various global markets from 1997 to 2012 found that conventional indices in Europe, Japan, and the UK were efficient, while none of the Islamic indices met this criterion. However, during financial downturns, Islamic indices demonstrated similar levels of efficiency to their conventional counterparts, suggesting a potential resilience in turbulent times.
Adaptive Market Hypothesis
Further analysis using the Adaptive Market Hypothesis (AMH) on Dow Jones Islamic Indices (DJII) from 1996 to 2015 supports the notion that Islamic indices have become more efficient over time, particularly during financial crises. This indicates that Islamic indices may adapt better to changing market conditions compared to the Efficient Market Hypothesis (EMH).
Performance and Risk Analysis
Risk-Adjusted Performance
Several studies have evaluated the performance of Islamic indices using various risk-adjusted measures. In India, Islamic indices showed slightly superior performance based on the Sharpe ratio, Treynor ratio, and information ratio, although differences were statistically insignificant when using models like CAPM and Fama-French. Similarly, a global study from 1999 to 2011 found that Islamic indices outperformed conventional indices in terms of risk-adjusted returns.
Risk Characteristics
An extensive analysis of 35 indices from developed, emerging, and GCC markets between 2002 and 2012 revealed no significant difference in mean returns between Islamic and conventional indices, except in Italy and Australia. The study also noted the presence of leverage effect risk in all indices, indicating that Islamic indices do not necessarily offer lower risk compared to conventional ones.
Standardization and Screening Criteria
Shariah Compliance
The criteria for Shariah compliance vary across different Islamic market indices, leading to a lack of uniformity. A qualitative study comparing the selection criteria of four Islamic market indices highlighted differences in aspects like Halal business and debt ratios. This lack of standardization can affect the comparability and performance assessment of Islamic indices.
Investment Viability
Ethical Investment
Islamic indices provide a viable investment avenue for faith-based investors without compromising financial performance. The promotion of faith-based investments can also enhance financial inclusion by attracting a significant segment of the population into the formal financial system.
Volatility and Connectedness
The dynamic connectedness between commodities and Islamic stock indices shows that commodities are a significant source of shocks to Islamic markets, especially during crises like the COVID-19 pandemic. This suggests that while Islamic indices may offer ethical investment options, they are not immune to global market volatilities.
Conclusion
Islamic stock indices present a mixed picture in terms of efficiency and performance compared to conventional indices. While they may not always be as efficient, they show resilience during financial downturns and offer comparable risk-adjusted returns. The lack of standardization in Shariah compliance criteria remains a challenge, but Islamic indices continue to be a viable and ethical investment option for faith-based and conventional investors alike.
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