Risk and Return of Islamic and Conventional Indices

This study examines the risk and the return characteristics of the Islamic market indices versus their conventional counterpart indices. For this purpose, a large international data of 35 indices combining developed, emerging and GCC markets over the period of Jun 2002 to April 2012 is used. The t test has been employed to investigate the mean returns difference between both types of indices. The results show that there is no significant difference in mean between Islamic and conventional indices except for Italy and Australia. The EGARCH estimation results reveal the presence of a leverage effect risk in all studied indices. The study of the risk adjusted performances of Islamic stock market indices versus their conventional counterpart indices using differences-in-Sharpe ratio test and the CAPM model show that in the entire period as well as in the crisis period there is no difference between performance the types of indices in risk adjusted return basis. Consequently, Muslim investors can pursue passive stock investments in conformity to their religious beliefs without sacrificing financial performance.