Advertisement

Does Islamic Capital Asset Pricing Model Outperform Conventional Capital Asset Pricing Model?

  • Nousheen Tariq Bhutta
  • Biagio Simonetti
  • Viviana VentreEmail author
Chapter
Part of the Studies in Systems, Decision and Control book series (SSDC, volume 247)

Abstract

This chapter aims to identify the difference between conventional and Islamic capital asset pricing model in order to ensure the efficient investment management of products and markets. Based on theoretical literature and critical and empirical analysis, it provides key justifications for why and how Islamic capital asset pricing model outperforms the conventional capital asset pricing model. The data has been extracted from 69 companies in the period 2000 to 2017, listed at Karachi stock exchange. It provides potential contribution towards the existing body of knowledge through incorporating risk and return perspective in capital market theory. Here, it has been found that Islamic investment is a low risk investment as compared to a conventional one. Moreover, Islamic lenders must share some proportional in profit and risk, which trade-off in risk shares, not in risk-return. It is suggested that Islamic investment strategy is more profitable than the other in case of direct sharing contract. Lastly, recommendations and policy reforms have been discussed for implementation of Islamic investment strategy.

Keywords

Islamic capital asset pricing model Risk management Investment strategy 

References

  1. Black, F.: Capital market equilibrium with restricted borrowing. J. Bus. 45, 444–455 (1972)CrossRefGoogle Scholar
  2. Black, F., Jensen, M., Scholes, M.: The capital asset pricing model: some empirical tests. In: Jensen, M. (ed.) Studies in the Theory of Capital Markets. Praeger, New York (1972)Google Scholar
  3. Cheung, Y.L., Wong, K.T.: An assessment of risk and return: some empirical findings from Hong Kong stock exchange. Appl. Financ. Econ. 2, 105–114 (1992)CrossRefGoogle Scholar
  4. Davis, J.L., Fama, E.F., French, K.R.: Characteristics, co variances and average returns: 1929 to 1997. J. Finance 55, 389–406 (2000)CrossRefGoogle Scholar
  5. Eatzaz, Attiya, : Testing multifactor capital asset pricing model in case of Pakistani market. Int. Res. J. Finance Econ. 25, 114–138 (2008)Google Scholar
  6. Ernst, Young: World Islamic Banking Competitiveness Report 2013 (2013)Google Scholar
  7. Fama, E., French, K.: The cross-section of expected stock returns. J. Finance 47, 427–660 (1992)CrossRefGoogle Scholar
  8. Fischer, I.: The Theory of Interest. Augustus M. Kelly, New York, NY (1930)Google Scholar
  9. Fischer, I.: The Theory of Interest (a Reprint), New York, NY (1965)Google Scholar
  10. Fraser, P., Hamelink, F.: Time-varying betas and the cross sectional return risk relation: evidence from the UK. Eur. J. Finance 10(4), 255–276 (2004)CrossRefGoogle Scholar
  11. Groenewold, N., Fraser, P.: Share prices and macroeconomics. J. Bus. Finance Account. 24, 1367–1383 (1997)CrossRefGoogle Scholar
  12. Hanif, M., Bhatti, U.: Validity of capital assets pricing model: evidence from KSE-Pakistan. Eur. J. Econ. Finance Adm. Sci. 20, 148–161 (2010)Google Scholar
  13. Hirschleifer, J.: On the theory of optimal investment decision. J. Polit. Econ. 66 (1958)Google Scholar
  14. Jomo, K.: Islamic Economic Alternatives. Macmillan, London (1992)CrossRefGoogle Scholar
  15. Lau, S.C., Quay, S.R., Ramsey, C.M.: The Tokyo stock exchange and the capital asset pricing model. J. Finance 29(2), 507–514 (1974)CrossRefGoogle Scholar
  16. Lintner, J.: The valuation of risk assets and selection of risky investments in stock portfolio and capital budgets. Rev. Econ. Stat. 47(1), 13–47 (1966)CrossRefGoogle Scholar
  17. Lotfy, A.: The Foundations Islamic Finance: A Comparative Study with Conventional Methods. The American University in Cairo, Research paper (unpublished), Economics Department (2005)Google Scholar
  18. Markowitz, H.: Portfolio selection. J. Finance 12, 71–91 (1952)Google Scholar
  19. Markowitz, H.: Travels along the efficient frontier. Dow Jones Asset Management (1997)Google Scholar
  20. Mossin, J.: Equilibrium in a capital asset pricing market. Econometrica 34, 768–783 (1966)CrossRefGoogle Scholar
  21. Raei, R., Mohammadi, S.: Fractional return and fractional CAPM. Appl. Financ. Econ. Lett. 4, 269–275 (2008)CrossRefGoogle Scholar
  22. Roll, R.W.: A critique of asset pricing theory’s tests, Part 1: on past and potential testability of the theory. J. Financ. Econ. 4, 129–176 (1977)CrossRefGoogle Scholar
  23. Sadaf, R., Andleeb, S.: Islamic capital asset pricing model. J. Islamic Bank. Finance 2(1), 187–195 (2014)Google Scholar
  24. Selim, T.H.: An Islamic capital asset pricing model. Humanomics 24(2), 122–129 (2008)CrossRefGoogle Scholar
  25. Sen, K.: On Ethics and Economics. Blackwell, Oxford (1987)Google Scholar
  26. Sharpe, W.: Capital asset prices: a theory of market equilibrium under conditions of risk. J. Finance, September (1964)Google Scholar
  27. Treynor, J.L.: Toward a Theory of Market Value of Risky Assets. Unpublished manuscript, undated (1961)Google Scholar

Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  • Nousheen Tariq Bhutta
    • 1
  • Biagio Simonetti
    • 2
  • Viviana Ventre
    • 3
    Email author
  1. 1.University of SannioBeneventoItaly
  2. 2.WSB University in GdanskGdanskPoland
  3. 3.National Institute of Geophysics and Volcanology (INGV)NaplesItaly

Personalised recommendations