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6Islamic Economic Studies Vol. 17 No. 2underperform broad benchmarks. In addition, the authors suggest that, if somesocially responsible funds beat broad benchmarks, it is likely due to styleinvestments rather than social responsible screening.The literature on Islamic investing, a subset of ethical investing, is still at itsinfancy. The following articles best describe the stage of current of research onfaith-based Islamic investing.Hassan (2002) empirically examines the issues of market efficiency and thetime-varying risk return relationship for the DJIM over the 1996-2000 period. Hispaper employs serial correlation, variance ratio and Dickey Fuller tests to examinethe market efficiency of the DJIM. The results show that DJIM returns arenormally distributed and the returns show that DJIM returns are efficient. Thepaper also examines calendar anomalies of the DJIM. The results show that thereis no turn-of-calendar-year, turn-of-financial-year, month effect of DJIM returns.Utilizing a GARCH framework, the paper examines volatility of the DJIM returnsand finds a significant positive relationship between conditional volatility andDJIM equity index returns.Hakim and Rashidian (2002) employ a co-integration and causality analysis toexamine the relationship between the DJIM, Wilshire 5000 Index, and the risk-freerate proxied by the three month treasury bill over the time period 1999-2002. Theyfind no correlation between the DJIM and the Wilshire 5000 Index, or the threemonth Treasury bill. The results also show that the changes in the DJIM are notcaused by either the Wilshire 5000 Index or the three month treasury bill. Theyconclude that the filtering criteria adopted to eliminate non-compliant firms leadsto an Islamic index with unique risk-return characteristics unaffected by the broadequity market. Hakim and Rashidian (2004) use a capital asset pricing model(CAPM) to examine to what extent a Shar ah compliant index is correlated withthe Dow Jones World Index (DJW) and Dow Jones Sustainability World Index(DJS) or green index. Their results show that the DJIM has done relatively wellcompared to the DJW, but has underperformed in relation to the DJS.Hussein (2005) provides a comprehensive study of the accurate performance ofeach Islamic index by capturing the effects of industry, size, and economicconditions on DJIM returns. Covering the period 1996-2003, he examines thehypothesis that returns earned by investors who purchase each share in Islamicindexes for an equal amount of money are significantly different from their indexcounterparts, throughout the entire bull and bear periods. He finds that Islamicindexes provide investors with positive abnormal returns throughout the entire bullperiod, but they underperform their non-Islamic index counterparts during the bearmarket period. He argues that positive abnormal returns by Islamic indexes are notdue to technology sector investing by these indexes. Rather, these abnormal returns
Hassan and Girard: Faith-Based Ethical Investing: The Case of Dow Jones Islamic Indexes7are driven by investing in small size, basic material, consumer cyclical, industrialand telecommunication firms.Hussein (2004) examines the performance of FTSE index funds vis-à-visconventional funds (FTSE all world index) over a period of January 1996-July2003 by using a number of performance measures such as Sharpe, Treynor, Jensenmeasures and CAPM, but does not use more sophisticated methods a such multifactormeasures such as Fama-French 3 factor and Carhart 4 factor models. Hefinds that FTSE indices perform as well as conventional indices during overallperiod, but overperforms well during bull period and underperforms during bearishperiod.Elfakhani, Hassan and Sidani (2005) examine Islamic mutual funds and thefundamentals of investing in such venues. They explore the dynamics of Islamicmutual funds, their governance and control, and marketing and distribution. Theypresent the results of a study verifying whether the application of the Islamicinvestment guidelines in asset allocation and portfolio selection has had a downsideeffect on investors’ wealth in terms of risk-adjusted returns relative to the marketbenchmark. Considering the overall sample of 46 Islamic mutual funds, the totalnumber of outperforming funds ranges between 29 funds (63 percent of thesample) and 11 funds (24 percent), depending on the used performance measureand market benchmark. In terms of fund category, four of the eight fund categoriesoutperform their benchmarks regardless of what performance measure is used.Moreover, the ANOVA statistical test shows that no statistically significantdisparity exists for the performance of the funds compared to all used indexes.Therefore, a conclusion of their study is that the behavior of Islamic mutual fundsdoes not differ from that of other conventional funds, with some Shar ahcompliant mutual funds outperforming their benchmarks and others underperformingthem.Elfakhani, Hassan and Sidani (2005) use the Treynor-Mazury (TM) model tomeasure the security-selection ability and market-timing ability of Islamic mutualfund managers. Their results show that the American Equity Fund, the EuropeanEquity Fund, the combined Emerging Fund, and the Technology Fund all havepositive security selection, but only the Emerging Equity Fund has positiveselectivity that is statistically significant. The remaining three funds (i.e., Global,Asian and Malaysian funds) have negative selectivity performance during the sameperiod. This is not so surprising as the results may be dominated by the Asiancrisis, while Western funds are less affected during the same sampling period. Inparticular, the Asian Equity Fund performs very badly as the intercept isstatistically and significantly negative at the one percent level. However, otherresults show that the Asian Equity Fund has a significant positive market timingperformance; all remaining funds have negative market timing performanceparticularly the European and the combined Emerging Funds that are statistically
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