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

Salman Ahmed Shaikh, Mohd Adib Ismail, Abd. Ghafar Ismail, Shahida Shahimi, Muhammad Hakimi Mohd. Shafiai

Research output: Contribution to journalArticle

Abstract

Purpose: This paper aims to study the cross section of expected returns on Shari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models. Design/methodology/approach: To estimate cross section of expected returns of Shari’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 using Lintner (1965), Black et al. (1972) and Fama 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 use Shari’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 on Shari’ah-compliant stocks. Originality/value: This is the first study on Fama-French (2015) five-factor model for Islamic capital markets in Pakistan.

Original languageEnglish
Pages (from-to)282-302
Number of pages21
JournalInternational Journal of Islamic and Middle Eastern Finance and Management
Volume12
Issue number2
DOIs
Publication statusPublished - 30 Apr 2019

Fingerprint

Pakistan
Cross-section of stock returns
Five-factor model
Cross section
Factors
Expected returns
Value premium
Capital asset pricing model
Multifactor asset pricing model
Market portfolio
Portfolio diversification
Capital markets
Fama-French three-factor model
Premium
Excess returns
Design methodology
Value stocks
Fund managers

Keywords

  • Asset pricing
  • CAPM
  • Factor models
  • Islamic capital markets
  • Shari’ah-compliant stocks

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Strategy and Management

Cite this

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title = "Cross section of stock returns on Shari’ah-compliant stocks: evidence from Pakistan",
abstract = "Purpose: This paper aims to study the cross section of expected returns on Shari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models. Design/methodology/approach: To estimate cross section of expected returns of Shari’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 using Lintner (1965), Black et al. (1972) and Fama 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 use Shari’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 on Shari’ah-compliant stocks. Originality/value: This is the first study on Fama-French (2015) five-factor model for Islamic capital markets in Pakistan.",
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AB - Purpose: This paper aims to study the cross section of expected returns on Shari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models. Design/methodology/approach: To estimate cross section of expected returns of Shari’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 using Lintner (1965), Black et al. (1972) and Fama 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 use Shari’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 on Shari’ah-compliant stocks. Originality/value: This is the first study on Fama-French (2015) five-factor model for Islamic capital markets in Pakistan.

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