Identification of risk factors: a comparison of conventional and Islamic stocks
Abstract
The study identifies the difference in the long-run risk factors for Conventional Capital Market (CCM) and Islamic Capital Market (ICM) in the post-Shari’ah-screening era in an emerging market. The sample includes macroeconomic variables representing the real sector (industrial production), money market (interest rate), international market (exchange rate) and external sector (exports and workers’ remittances) and two market indexes for 164 Months (01/10–08/23). Johansen cointegration and Granger causality tests are applied to document the evidence. Results support the integration of market indexes with macroeconomic indicators; however, market indexes lack mutual integration in the long run. The integrated group of variables differs slightly for ICM (exchange rate and industrial production) and CCM (industrial production). The real sector activity is reflected in the market, while the monetary sector is missing. The behaviour of the Islamic market is in line with the theory – a reflection of the real sector and lack of integration with interest rates. We recommend three policy actions, including improved facilitation of industrial production, prudent management of exchange rate, and a balanced monetary policy, as theory suggests the usefulness of stock indicators for monetary policymaking. The comparative study on macroeconomic risk factors in an emerging market enhances the understanding of a market with dual indexes, including CCM and ICM.
First published online 31 March 2025
Keyword : stock market risk, macroeconomic variables, asset pricing, Islamic capital market
How to Cite
Hanif, M. (2025). Identification of risk factors: a comparison of conventional and Islamic stocks. Technological and Economic Development of Economy, 1-24. https://doi.org/10.3846/tede.2025.22918
This work is licensed under a Creative Commons Attribution 4.0 International License.
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Hanif, M., & Bhatti, A. A. (2018). Causality among stock market and macroeconomic factors: A comparison of conventional and Islamic stocks. Journal of Islamic Business and Management, 8(2), 423–449. https://doi.org/10.26501/jibm/2018.0802-006
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Hassan, M. K., & Girard, E. (2010). Faith based ethical investing: The case of Dow Jones Islamic Indexes. Islamic Economic Studies, 17(2), 1–31. https://doi.org/10.2139/ssrn.1808853
Hassan, M. K., Khan, A. N. F., & Ngow, T. (2010). Is faith based investing rewarding? The case for Malaysian Islamic unit trust funds. Journal of Islamic Accounting & Business Research, 1(2), 148–171. https://doi.org/10.1108/17590811011086732
Hayat, R., & Kraeussl, R. (2011). Risk and return characteristics of Islamic equity funds. Emerging Markets Review, 12(2), 189–203. https://doi.org/10.1016/j.ememar.2011.02.002
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Hosseini, S. M., Ahmad, Z., & Lai, Y. W. (2011). The role of macroeconomic variables on stock market index in China and India. International Journal of Economics and Finance, 3(6), 233–243. https://doi.org/10.5539/ijef.v3n6p233
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Khatkhatay, M. H., & Nisar, S. (2007). Shari’ah compliant equity investments: An assessment of current screening norms. Islamic Economic Studies, 15(1), 47–76.
Kwon, C. S., & Shin, T. S. (1999). Cointegration and causality between macroeconomic variables and stock market returns. Global Finance Journal, 10(1), 71–81. https://doi.org/10.1016/S1044-0283(99)00006-X
Lamba, A. S. (2005). An analysis of the short- and long-run relationships between South Asian and developed equity markets. International Journal of Business, 10(4), 383–402.
Lipka, M. (2017). Muslims and Islam: Key findings in the U.S. and around the world. Pew Research Centre. http://www.pewresearch.org/fact-tank/2017/08/09/muslims-and-islam-key-findings-in-the-u-s-and-around-the-world/
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Mansoori, M. T., & Khan, A. (2015). Investment in equities: Sharī’ah appraisal of screening norms. Journal of Islāmic Business and Management, 5(1), 51–68. https://doi.org/10.12816/0027382
Masuduzzaman, M. (2012). Impact of the macroeconomic variables on the stock market returns: The case of Germany and the United Kingdom. Global Journal of Management and Business Research, 12(16), 23–34.
Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x
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