Do ‘Shariah’ indices surpass conventional indices? A study on Dhaka Stock Exchange

Abstract

Purpose

This paper aims to examine whether the Sharīʿah indices outperform the conventional indices as evident from Dhaka Stock Exchange (DSE). To achieve the objective, the study, first, assesses the risk adjusted returns of the Sharīʿah and conventional indices and compares the same between the two indices. Second, it examines the short-run and long-run associations between the two indices.

Design/methodology/approach

The DSEX Sharīʿah index and DSE broad index of the DSE are used as representatives of the Sharīʿah and conventional indices, respectively. The study uses monthly data for the period 2014–2018 and applies a number of techniques such as risk adjusted returns, Johansen’s cointegration test, vector error correction model, Granger causality test, forecast error variance decomposition and impulse response functions techniques.

Findings

The study reveals that albeit there is no significant difference in simple mean between the two indices, the Sharīʿah index outperforms its conventional counterpart based on the risk adjusted returns. The two indices are associated only in the long-run, while no causal relationship is spotted between them. The overall results show that the Sharīʿah index has dominance over the conventional index in Bangladesh.

Research limitations/implications

The study could use more pairs of indices, including additional variables such as financial crisis and macroeconomic variables.

Practical implications

The study has important implications to investors, especially the religious Muslims and ethical ones, who are suggested to invest their funds in the Sharīʿah index without sacrificing returns, rather be monetarily more benefited. Moreover, the other investors can generate diversification benefits by adding both Sharīʿah and conventional indices in their portfolios in the short-run.

Originality/value

Unlike previous studies, this study endeavors to use a comprehensive methodology to conduct its analysis. Moreover, this is supposedly the first ever effort to conduct such a study in the context of Bangladesh.

Citation

Aarif, M.B.H., Rafiq, M.R.I. and Wahid, A.N.M. (2021), "Do ‘Shariah’ indices surpass conventional indices? A study on Dhaka Stock Exchange", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 14 No. 1, pp. 94-113. https://doi.org/10.1108/IMEFM-01-2020-0027