Performance of Islamic and conventional stock indices:empirical evidence from an emerging economy

Background:This study aims to investigate the extent to which the conditional volatilities of both Shari’ah compliant stock and conventional stock are related to those of interest rate and exchange rate in the emerging economy of Pakistan.Methods:We used KMI 30 and KSE 100 indices for Islamic and conventional stock for the period of July 2008 to November 2013.We employed Generalized Autoregressive Conditional Heteroskedastic in the mean(GARCH-M)model.This framework relaxes constancy assumption of classical linear regression(CLRM)model and allows exchange rate and interest rate volatility to evolve over time.The GARCHM framework also reveals results about risk-return trade-off in the context of both Islamic and conventional stock indices.Results:The findings show positive and statistically significant effect of interest rate volatility on KSE-100,whereas KMI-30 remains unaffected by the same.Exchange rate volatility is found to be significant for both conventional and Islamic indices.The relationship of risk coefficient(γ)and stocks returns,as expected,is positive and statistically significant for both KMI-30 and KSE-100.This result is consistent with the theory of risk-return trade-off.The results of parametric t-test show significant difference between returns of both indices.This implies that Shari’ah compliant stock index(KMI-30)of Pakistan underperforms its conventional counterpart.Conclusion:By using different performance measures(Sharp ratio,Jensen alpha,Treynor ratio),this study also investigates the hypothesis that Islamic stock index has inferior performance compared with unscreened conventional counterparts due to availability of a smaller investment universe,increased monitoring costs,and limited diversification.

Cointegration and Causality Relationship Between Stock Market,Money Market and Foreign Exchange Market in Pakistan

This paper examines the relationship between stock market(KSE-100), money market(M2 and 180 days T-bill rate), and foreign exchange market(ER: PKR/USD) in Pakistan by using monthly data covering the period from 2000:M1 to 2015:M12. The study investigates long-run equilibrium relationship between these three financial markets by employing Johansen and Juselius[1]cointegration tests. Long-run and short-run causality relationship between stock market and other macroeconomic variables is also established by employing vector error correction model(VECM) and pairwise granger causality tests. The results of multivariate cointegration test(trace test) indicate a one cointegrating vector, and the significant normalized cointegrating coefficients are evident of long run equilibrium relationship between all the selected variables. Negative and significant ECT(-1) for all variables during full sample period witness the presence of long-run causality connection among variables, while during the military regime and democratic regime, significant difference of long-run causal connections are identified across the regimes. Moreover, the results of granger causality test also indicate that there are significant variations in the causality relationship among variables across the regimes. Therefore, it is essential for forecasting, planning and policy making to consider the importance of political governance system while analyzing the historical cointegration among financial market and make the necessary adjustments accordingly.