The profitability of trading strategies from sharia-compliant and conventional banks in the GCC: a comparative study

Abstract

Purpose

The purpose of this research was to examine the effectiveness of filter rules and investigate the weak form of the efficient market hypothesis (EMH) on sample shares of shariah-compliant vs. conventional banks listed on the Gulf Cooperation Council (GCC) stock market.

Design/methodology/approach

Nine trading filter strategies with different statistical analyses were used as defined in the literature (Fifield et al., 2005; Almujamed et al., 2018). Daily closing equity prices of a sample of twenty shariah-compliant banks and twenty conventional banks were recorded over the 18-year period ending 31 December 2017.

Findings

Shares of shariah-compliant banks in the GCC were not weak-form efficient since trading based on past information was predictable, profitable and outperformed the corresponding naïve buy-and-hold trading strategy. Shares of conventional GCC banks underperformed

Research limitations/implications

This paper’s findings should be useful for central banks and capital market authorities in GCC countries for evaluation when considering new regulations or process changes. Limitations include small sample numbers and need for more recent evaluations of accounting disclosure levels. A wider range of data, statistical analyses and other trading strategies is needed. Potential investors (Muslim and non-Muslim), shariah supervisory boards, and preparers of financial statements can benefit from this study.

Practical implications

The results suggest that selection of trading strategy affects the success of the rule and that mid-sized filters are the best.

Originality/value

This is an innovative study comparing performance of shariah-compliant and conventional banks under different filter rules.

Citation

AlMujamed, H.I. (2021), "The profitability of trading strategies from sharia-compliant and conventional banks in the GCC: a comparative study", Journal of Investment Compliance, Vol. 22 No. 1, pp. 74-94. https://doi.org/10.1108/JOIC-11-2020-0046