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Do Islamic fundamental weighted indices outperform their conventional counterparts? An empirical investigation during the crises in the MENA region

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Abstract

This paper investigates the performance of Islamic fundamental weighted (FW) portfolios compared to that of non-Islamic counterparts, to examine whether Shari’ah-compliant stocks can protect investors during crises in the Middle East and North Africa region. Portfolios’ performance is assessed using several risk-adjusted performance measures including more robust measures in the context of recently developed multi-factor models. The study’s findings suggest that the performance of Islamic and non-Islamic FW portfolios depends on the performance measures used and on the periods under analysis. Both Islamic and non-Islamic FW portfolios underperform against the cap-weighted benchmark. Furthermore, the Islamic portfolios underperform compared to their non-Islamic counterparts during the period of the global financial crisis, while they perform similarly to their non-Islamic counterparts during the Arab Spring period. Based on these results, we conclude that Islamic FW portfolios do not seem to protect investors from losses during crises.

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Notes

  1. See Hasan and Dridi (2011), Sukmana and Kholid (2012), and Arshad and Rizvi (2013), among others.

  2. To test the statistical significance of the Sharpe ratio and Sortino ratio differences, the Jobson and Korkie (1981) test with the Memmel (2003) correction is used. The Z statistic approximately follows a standard normal distribution, and it is calculated as follows:

    \({z = \frac{{SR_{1} SR_{2} }}{{\sqrt {1/T[2(1 - \rho_{1,2} ) + 1/2(SR_{1}^{2} SR_{2}^{2} - SR_{1} SR_{2} (1 + \rho_{1,2}^{2} )}} }}\)

    where SR is the portfolio’s Sharpe ratio (Sortino ratio), T is the number of observations and ρ1,2 is the correlation between portfolios 1 and 2.

  3. These factors for the MENA region are computed by the researchers.

  4. If a fundamental metric is negative, it is set equal to zero. This approach excludes short positions in stocks. However, it may introduce a potential bias into our data, given that companies with negative metrics are replaced with zero in the dataset. In our dataset, the number of firms with negative fundamentals is rather small. In addition, we consider several fundamentals, as well as a combination of them; therefore, excluding firms with negative fundamentals does not cause a significant problem for our analysis. Moreover, for those companies that do not pay DIV, we exclude this metric and use the average of the three other metrics to calculate the composite fundamental metric of such stocks.

  5. The multi-factor models’ coefficients for the period 2007–2015 are available upon request.

  6. The multi-factor models’ coefficients for the global financial crisis period (2007–2009) are available upon request.

  7. The multi-factor models’ coefficients for the Arab Spring period (2011–2015) are available upon request.

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Acknowledgement

This work was carried out within the funding with COMPETE reference no POCI-01-0145-FEDER006683, with the FCT/MEC’s (Fundaçãopara a Ciência e a Tecnologia, I.P.) financial support through national funding and by the ERDF through the Operational Programme on “Competitiveness and Internationalization COMPETE 2020 under the PT2020 Partnership Agreement”.

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Authors and Affiliations

  1. NIPE, School of Economics and Management, University of Minho, Braga, Portugal

    Rasha Tawfiq Abadi & Florinda Silva

  2. Department of Finance, Arab American University, Jenin, Palestine

    Rasha Tawfiq Abadi

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  1. Rasha Tawfiq Abadi
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  2. Florinda Silva
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Correspondence to Rasha Tawfiq Abadi.

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Abadi, R.T., Silva, F. Do Islamic fundamental weighted indices outperform their conventional counterparts? An empirical investigation during the crises in the MENA region. Eurasian Econ Rev 12, 241–266 (2022). https://doi.org/10.1007/s40822-020-00158-x

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