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The Relative Risk Performance Of Islamic Finance: A New Guide To Less Risky Investments

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  • HAITHAM A. AL-ZOUBI

    (Department of Economics and Finance, United Arab Emirates University, Al-Ain, United Arab Emirates)

  • AKTHAM I. MAGHYEREH

    (Department of Economics and Finance, United Arab Emirates University, Al-Ain, United Arab Emirates)

Abstract

We examine the relative risk performance of the Dow Jones Islamic Index (DJIS) and find that the index outperforms the Dow Jones (DJIM) WORLD Index in terms of risk. Using the most recent Value-at-Risk (VaR) methodologies (RiskMetrics, Student-t APARCH, and skewed Student-t APARCH) on the 1996–2005 period, and assuming one-day holding period for both indices with a moving window of 500 day data, we show that the value of VaR is greater for DJIM WORLD than for DJIS Islamic. We interpret the results mainly to the profit-and-loss sharing principle of Islamic finance where banks share the profits and bear losses (Mudarabah) or share both profits and losses (Musharaka) with the firm.

Suggested Citation

  • Haitham A. Al-Zoubi & Aktham I. Maghyereh, 2007. "The Relative Risk Performance Of Islamic Finance: A New Guide To Less Risky Investments," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 235-249.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:02:n:s0219024907004184
    DOI: 10.1142/S0219024907004184
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    References listed on IDEAS

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    1. Ilya A. Strebulaev, 2007. "Do Tests of Capital Structure Theory Mean What They Say?," Journal of Finance, American Finance Association, vol. 62(4), pages 1747-1787, August.
    2. El-Hawary & Dahlia & Grais, Wafik & Iqbal, Zamir, 2004. "Regulating islamic financial institutions : The nature of the regulated," Policy Research Working Paper Series 3227, The World Bank.
    3. Ilya Strebulaev, 2004. "Do tests of capital structure mean what they say?," 2004 Meeting Papers 592c, Society for Economic Dynamics.
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