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Cross section of stock returns onShari’ah-compliant stocks: evidence from Pakistan

Author

Listed:
  • Salman Ahmed Shaikh
  • Mohd Adib Ismail
  • Abdul Ghafar Ismail
  • Shahida Shahimi
  • Muhammad Hakimi Mohd. Shafiai

Abstract

Purpose - This paper aims to study the cross section of expected returns onShari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models. Design/methodology/approach - To estimate cross section of expected returns ofShari’ah-compliant stocks, the study uses capital asset pricing model (CAPM), Fama-French three-factor model and Fama-French five-factor model. Data for the period 2001-2015 on 217 companies are used. For the market portfolio, PSX-100 and Dow Jones Islamic Index for Pakistan are used. Findings - The study could not find empirical support for CAPM usingLintner (1965),Blacket al.(1972) andFama and Macbeth (1973) approach. Nonetheless, the relation between beta and returns is positive in up-market and negative in down-market. The results of Fama-French three-factor and five-factor models suggest that size premium is positive and significant for explaining the cross section of stock returns of small size stocks, whereas value premium is positive and significant for explaining the cross section of returns of high value stocks. Practical implications - The results suggest that fund managers can useShari’ah-compliant stocks for portfolio diversification and for offering specialized investments given the positive market excess returns and the existence of size and value premium onShari’ah-compliant stocks. Originality/value - This is the first study onFama-French (2015) five-factor model for Islamic capital markets in Pakistan.

Suggested Citation

  • Salman Ahmed Shaikh & Mohd Adib Ismail & Abdul Ghafar Ismail & Shahida Shahimi & Muhammad Hakimi Mohd. Shafiai, 2019. "Cross section of stock returns onShari’ah-compliant stocks: evidence from Pakistan," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 12(2), pages 282-302, June.
    • Handle: RePEc:eme:imefmp:imefm-04-2017-0100
    DOI: 10.1108/IMEFM-04-2017-0100
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    More about this item

    Keywords

    CAPM; Islamic capital markets; Asset pricing; Factor models; Shari’ah-compliant stocks; G11; G12; G17;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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