faith-based ethical investing: the case of dow jones islamic ... - IRTI

26Islamic Economic Studies Vol. 17 No. 2Controlling performance for style and time variability, we find that Islamicindices are growth focused and MSCI indices are value focused. In addition,Islamic indices comprise smaller firms that MSCI indices. In sum, Islamic indexesare growth and small-cap oriented and conventional indices are relatively morevalue and mid-cap focused. We suggest that one reason behind the high proportionof growth stocks may come from the exclusion of value sectors with higherenvironmental risk like chemical, energy and basic industries.After controlling for market risk, size, book-to-market, momentum, local andglobal factors, we conclude that the difference in return between Islamic andconventional indices is rarely significant — i.e., only few the alphas aresignificantly different from zero. Although, Islamic indices convincinglyoutperform conventional indices during the first period (1996-2000), theyunderperformed the same conventional indices during the last period (2001-2005).Our findings suggest that the period-specific performance of Islamic indices islikely attributed to style differences between the two types of series.The multivariate cointegration analysis suggests that both the Islamic andconventional groups are poorly integrated for the overall period. However, thereseems to be some strong common stochastic trends in both groups during the firstperiod (at most two significant cointegrating equations). For the second period, theIslamic group remains somewhat cointegrated while the non-Islamic group showslittle evidence of common stochastic trends.Our findings suggest that the behavior of DJIM indexes does not differfrom that of their conventional counterparts, with some indexes outperformingtheir conventional counterparts and others under-performing them. Overall, similarreward to risk and diversification benefits exist for both type of indexes.