The Relative Risk Performance of Islamic Finance: A New Guide to Less Risky Investments

Abstract

We examine the relative risk performance of the Dow Jones Islamic Index (DJIS) and find that the index outperforms the Dow Jones (DJIM) WORLD Index in terms of risk. Using the most recent Value-at-Risk (VaR) methodologies (RiskMetrics, Student-t APARCH, and skewed Student-t APARCH) on the 1996–2005 period, and assuming one-day holding period for both indices with a moving window of 500 day data, we show that the value of VaR is greater for DJIM WORLD than for DJIS Islamic. We interpret the results mainly to the profit-and-loss sharing principle of Islamic finance where banks share the profits and bear losses (Mudarabah) or share both profits and losses (Musharaka) with the firm.

The Impact Of Financial Crisis On Islamic And Conventional Indices Of The GCC Countries

“…However, the results of this study suggest that in terms of volatility of Islamic index, there is negligible difference in both bear and bull periods. The results are also in contrast to Al-Zoubi and Maghyereh (2007), which suggests that the DJ Islamic index is less risk than the conventional DJ World Index.…”

How Performance of Jakarta Islamic Index (Jii) Stocks Relative to Other Stocks?

“…Previous studies that investigated the impact of Sharia screening on the investment performance, found that there were statistically significant differences between Sharia and conventional investments in the performance (Akhtar et al, 2011;Al-Zoubi & Maghyereh, 2007;Hassan et al, 2005;Hussein, 2004;Hussein & Omran, 2005;Hussein, 2007;Sadeghi, 2008;Yusof & Abdul Majid, 2007). However, some studies found that there were no significant differences between Sharia and conventional investment (Albaity & Ahmad, 2008;Charles et al, 2011;Dharani & Natarajan, 2008;Girard & Hassan, 2008;Natarajan & Dharani, 2012).…”

“…Next, the study of Sharia investment by Al-Zoubi and Maghyereh (2007) found that the Islamic index outperforms the Dow Jones WORLD index in term of risk. In addition, Hussein (2004) who examined whether returns earned by investors who purchases shares in the FTSE Global Islamic Index were significantly different from those of the FTSE All World Index, which is well diversified index, both in the short run and the long run.…”

Risk, return and mean‐variance efficiency of Islamic and non‐Islamic stocks: evidence from a unique Malaysian data set

“…Further, there are empirical studies suggesting that the volatility of Islamic stocks is lower than the market, such as Al‐Zoubi and Maghyereh (), Dharani and Natarajan (2010) and Shubbar (). One of the explanations suggested for the lower risk of Islamic stocks relative to the market is the profit‐and‐loss sharing (PLS) principle in Islamic finance which substitutes for interest earning under conventional finance (Al‐Zoubi and Maghyereh, ). Under profit‐and‐loss sharing, banks either share the profit and bear losses ( Mudarabah ) or share both profits and losses ( Musharaka ) with the firm.…”

“…Therefore, in good times, an Islamic firm will share its profit with the financier which usually provides higher returns for the financier than interest rates, while the firm experiences lower returns than the shareholders of a non‐Islamic firm. In bad times, when the Islamic firm bears a loss, the financier will bear the whole or part of the loss and therefore provides higher returns for shareholders in comparison to a non‐Islamic firm (Al‐Zoubi and Maghyereh, ). Akhtar et al .…”