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Title ISLAMIC RISK FACTOR IN EXPECTED STOCK RETURN : EVIDENCE FROM LISTED COMPANIES ON PAKISTAN STOCK EXCHANGE (PSX)

Author(s) Muhammad Arif

Abstract Increase in the wealth of Muslims increases the demand for Shariah-compliant products. However, wide acceptance of Shariah-compliant products stimulates the somber question that whether Islamic-products (Shariah-compliant) are alike to Conventional-products or not. So, this study is a first attempt in Pakistan to observe the presence of Islamic-Effect (IE) in cross-sectional stock returns data of Pakistani market i.e. (PSX). Monthly data of 112 listed companies with an equal number of Shariah-compliant and Non-Shariah compliant from July 2011 to June 2017 are used for investigation. Fundamentally, two methods Portfolio performance and time-series regression are used to achieve the desired objectives. The first method, Portfolio performance analysis along with risk-adjusted performance parameters Jensen’s alpha, Treynor and Sharpe are used to check the difference (Islamic-effect) between two portfolios. In the second method, time-series regression along with Four-Factor-Model (FFM) like Fama and French (1993) is used to check whether Islamic-Effect is a systematic risk-factor or not. The results derived from the first method indicate the presence of Islamic-Effect. The second method, evident that IE is a negative and significant systematic risk factor for Islamic companies and positive factor for Conventional companies. The inclusion of new risk factor (Islamic factor), while composing portfolio strategy may help investors to devise a suitable strategy. The magnitude of Islamic risk factor (CMI) is high for small companies and low or even insignificant for big companies. This indicates that small Islamic companies are more affected than big Islamic companies by this factor. A lenient Shariah screening criteria for small Islamic companies enabled them to mitigate this effect while remained under the roof of Shariah-Compliant. Additional analysis also evident that Four-Factor-Model is the best fit than both Single-Factor-Model (SFM) and Three-Factor-Model (FFM) while expressing stock return variations. Thus, the identification of new risk factor ‘Islamic-risk’ in Pakistan Stock Exchange (PSX) has important contribution for regulators, industry, investors and new researchers.

Type Thesis/Dissertation MS

Faculty Management Sciences

Department Management Sciences

Language English

Publication Date 2019-11-19

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