Risk and Return Characteristics of Islamic Indices: An Empirical Approach

The main purpose of this research is to demonstrate the risk and return characteristics of Islamic indices. Islamic indices calculated by DJ and MSCI in the case of Turkey, Malaysia, USA, and the UK are examined in the widest time range. Respective conventional benchmark indices have also been included in the analysis to evaluate the empirical findings in a comparative manner. In the empirical research in which the mean-variance analysis framework is adopted, single and multi-factor asset pricing models are also applied together with ratio analysis. According to the empirical findings, there are noticeable differences between the risk and return characteristics of Islamic indices and their conventional counterparts depending on the country, index type and time period studied. Islamic indices tend to perform better and to have a lower level of systematic risk than their conventional counterparts. However, most of these findings and tests are not statistically significant. Therefore, in technical terms, this study concludes that there is no significant difference between the risk and return characteristics of Islamic indices and conventional counterparts. Some evidence has been found supporting the widely asserted claim that Islamic indices do not have an optimal risk-return profile by opponent researchers. However, when the absolute and risk-adjusted returns and alpha coefficients provided by Islamic indices are taken into account it appears that Islamic indices do not perform poorly than their conventional counterparts. In other words, it can be said that Islamic index investors do not bear extra costs in the examined cases.