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2008/09 global financial crisis and included 8 countries and 4 geographical ... Junior and Franca (2011) defined the route that how should a financial crisis can be ... Italy 1990 crisis, New Zealand 1987 crisis, United States 1984 crisis, Iceland ...
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Performance of Islamic vs. Conventional Capital Markets during Global Financial Crisis: An Empirical Study Khalid Mehmood Department of Management Sciences

COMSATS Institute of Information Technology, Lahore, Pakistan [email protected]

Waheed Akhter Assistant Professor, Center of Islamic Finance, Department of Management Sciences,

COMSATS Institute of Information Technology, Lahore, Pakistan [email protected]

Muhammad Shahbaz Montpellier Business School, France [email protected],

Working Paper September, 2016

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Performance of Islamic vs. Conventional Capital Markets during Global Financial Crisis: An Empirical Study

Abstract Purpose: Islamic capital markets are different form conventional markets because they have distinct features that differentiate them from conventional markets and they follow the Shari’ah guidelines. The aim of this study is to investigate how the Islamic capital markets behave different from Conventional markets during financial crisis period. Methodology: This study investigates the performance of Islamic and conventional capital markets during the period from January 01, 2004 to December 31, 2015 covering the period of 2008/09 global financial crisis and included 8 countries and 4 geographical regions (Asia, Europe, North America and The World) in the sample. The performance of Islamic and conventional stocks is measured on the basis of risk and return. Both non-risk adjusted and risk adjusted techniques are applied. Results: The results of this paper show that during the overall period, conventional capital markets outperform the Islamic stocks with risk adjusted performance measures only. While, during the period of global financial crisis, Islamic capital markets outperform their conventional counterparts with both risk adjusted and non-risk adjusted performance measurement techniques. Originality: This is the first kind of study that has assessed the performance of Islamic and conventional capital markets in 8 countries and 4 geographical regions of the world. Research Implications: Islamic stocks may be used for the hedging of downside risk due to better performance during financial crisis. This study has important research implications for policy makers and investors to build an optimal portfolio to hedge for future risk. Key words: Islamic stock markets, Islamic finance, Performance, Global financial crisis.

Introduction The global financial crisis of 2008/09 shaped credit and liquidity crunch in the emerging and developed markets and steered the losses for individual and institutional investors, banks and other financial institutions (Foster and Magdoff, 2009). By making the expansionary fiscal policies in the economy by emerging and developed economies, this financial crisis enlarged the unemployment, reduce consumption and investment in the economy (Agnello and Sousa, 2011,

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2012; Shiller, 2008; Agnello et al., 2012 and Afonso and Sousa, 2011, 2012). Economics breakdown in many European and American economies and the bankruptcy of some countries i.e. Greece. Economics growth is quiet and negative, the government debts and public deficits touched record peak in several economies due to the global financial crisis. This crisis created serious questions on trading, arbitrage, portfolio choices, investment decisions, banking, risk management, resources allocation and risk aversion, economics budgeting and therefore the overall capitalist monetary system (Aglietta and Rigot, 2009, Aglietta, 2009). The central bank made many polices to limit the effect of this crisis, it reviewed the interest ratemany times in 2008-09 and to stimulate liquidity it injects the cash in the economy and use the latest financial instruments like quantitative Easing, and make such a polices that support the banking system to reduce the effect of this crisis (Arouri et al., 2011). In different times various summits organized like G8, G20 etc. and economists and policy makers called for risk management in this trouble time period of global financial crisis. So, in these summits typically the conventional products are criticized for their high and for advanced financial products i.e. derivatives, hedge funds etc. So, Jouini (2009) recommended that in the period of financial crisis Islamic products have become more attractive and protect the investors from high risky conventional products. With fewer risk and innovations Islamic financial products are now delivers favorable climate, secure financial conditions with moderate risk. During the last some years,Islamic finance is growing with remarkable growth, particularly in Southeast Asian Countries and became popular after the occurrence of 2008/09 global financial crisis. Islamic financial products are growing at the remarkable growth as in 2012 these were $1.6 trillion, in 2013 $1.8 trillion and growing at high growth and showing $2.1 trillion by the year 2014 and it is expected that total value of Islamic assets by 2020 will be $6.5 trillion. The Islamic bond market expected to be $131 billion. In 2012 the in the world wide the value of total assets of Islamic banking was $1.27 trillion. If we see the Islamic funds allocation which comprises of 9 % real assets, 11.8% mixed assets, 22.2% cash markets and 46.9% stocks (Shawkat et al., 2014). So, Islamic stocks which are about to 47% in portion which are very important for investors. So, Islamic capital stock markets become more important these days. This study looks at the performance of conventional and Islamic capital markets during the whole study period and during the period of global financial crisis. Defining a global financial crisis

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Junior and Franca (2011) defined the route that how should a financial crisis can be define. They took time series data of the fifteen stocks markets during the period of 1985 to 2010 from the different regions of the world. Then they converted these stocks indices into log-returns. They made a comparison among these indices and selected the ten most variated stock market indices. They noted that during the period from 1985 to 2010 there are two major crises, the Black Monday 1987, and the subprime crisis of 2008. They noted that are some minor crises are in 1989 the USA loan and saving crisis, in 1990 Japanese assets price bubble and the Scandinavian banking crisis, in 1992 the Black Wednesday crisis, the 1997 Asian financial crisis, the Russian crisis of 1998, 2000/01 Burst of dot.com bubble crisis. Another study on the period of crisis was conducted by Reinhart and Rogoff (2008). They list out the five big crises. The Spain 1977 crisis, the Norway 1987 crisis, the Finland (1991) crisis, the Sweden 1991 crisis and the Japan (1992) crisis.Other financial and banking crisis includes Italy 1990 crisis, New Zealand 1987 crisis, United States 1984 crisis, Iceland 1985 crisis, Germany 1977 crisis, Greece 1991 crisis, France 1994 crisis, Canada 1983 crisis, Denmark 1987 crisis, Australia 1989 crisis and United Kingdom 1973, 1991 and 1995 crises. These crises deteriorated the economy’s performance very badly. Islamic Finance Islamic financial system is the system which follows the teaching of Holy Quran and Holy Hadith of the holy prophet Muhammad (PBUH). The purpose of Islamic financial system is to provide the benefit to the individual and to the whole society as well. The objective of Islamic finance is to earn the optimal return by considering the Islamic laws. As the conventional finance is concern it deal only with the individual benefit only. Islamic finance has five main principals as studied by Shanmugam and Zahari, 2009. These principal are prohibition of investment in unethical industries, avoiding to investing from excessive uncertainty, prohibition of speculation, prohibition of interest and the risk and return sharing. Jouini (2009) proposed that Islamic finance is alternative to conventional finance with the constraints of Islamic law. Islamic finance was first started from the gulf council countries during nineties after that it is increasing at 12% annual rate (Causse, 2009). Now Islamic financial products spread all around the world. Islamic Capital Stock Markets

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Capital market included both equity and debt. In this paper only equity part of capital market will be considered. For the qualification of a company in the selection of Islamic stocks two stages of screening criteria applied, the qualitative screening and quantitative screening1. In qualitative screening is the screening of sectors, some sectors are prohibited by Islamic laws which are excluded in the first stage like conventional banking, alcoholic sector, film industry, conventional insurance companies. These sectors are prohibited because the core business of these sectors is prohibited by Islamic law. The revenue generated by the cinema or theater excluded because their core business involved in the activities which are prohibited by the Islamic law. This type of sector screening is called qualitative screening for the selection of Islamic stock. And in the quantitative screening some ratios are calculated and compared with the acceptable threshold. These ratios are based on pole traits of Interest, Investment, Liquidity, debt and non-permissible income.Every index provider2 uses some ratios, like the Dow Jones applied the three ratios: (a) Total debt of the firm divided by average of 12 months’ market capitalization should be less than thirty-three percent (b) Cash and interest securities divided by average of 12 months’ market capitalization should be less than thirty-three percent (c) Debtors divided by average of 12 months’ market capitalization should be less than thirty-three percent The remaining paper is organized as follow: in the next section previous studies are discussed then the methodology section is organized after that the results and discussion section is conferred and in the last conclusion is deliberated.

Literature Review Most of the studies on the performance of Islamic and conventional capital markets have done by many researchers after the emergence of Islamic stock market indices. Like Dow Jones which lunch its Islamic stock market index in 1999, and other index providers i.e. MSCI, FTSE etc. 1

For more study about screening criteria which was applied by different index providers read, Ulrich and Shehab (2008), for further KRÜGEROVÁ et al. (2015), Pitluck (2008) and for the study of permission of investment in shares study the Rahman (2014) 2 Index providers are the Dow Jones, Meezan Bank (Pakistan), FTSE, S&P, MSCI, HSBC, DIB, Azzad, Amiri etc. (Ulrich and Shahab, 2008)

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also in this period. Most of the studies before these index providers are based on the performance of Islamic and conventional mutual funds. So, studies on the performance of Islamic and conventional stock markets are divided into three categories, the performance of Islamic and conventional mutual funds, the performance of socially responsible and conventional funds and the performance of Islamic and conventional stocks. So, for the measurement of Islamic and conventional stocks the studies used stock market indices from the different index providers. Mostly studies exhibitedthe performance of Islamic and conventional stocks are same and there is no significant difference. Guarded (1997) applied950 socially universal stock funds and 1300 universal unscreened funds in the sample and he taken the time period from 1987-1994and gave conclusionthat the performance of both type of funds is equal.They concluded that performance of mutual funds vary from fund manager to fund manager.Ahmad and Ibrahim (2002) made the first study on the performance of Islamic and conventional stock indices and investigated that there no significance difference between the performance of Islamic and conventional stocks in MalaysianKLSI and KLCI indices during the study of period 1999 to 2002.Khaled (2004) during the period 1996 to 2003 on FTSE All-World Index and FTSE Global Islamic index and concluded that Islamic and conventional indices have same risk and return profiles. During bearish market `Islamic stocks are underperforming and during bullish market Islamic stocks are outperforming. Albaity and Ahmad (2008) examined the performance of Kuala Lumpur Syariah Index (KLSI) and Kuala Lumpur Composite Index (KLCI) (Malaysia) study period 1999 to 2005 revealed that 68% of the firms are the part of both Indices Islamic and conventional indices. They showed overall there is no significance difference between the return of conventional and Islamic stock indices in short run and long run.Hassan and Girard (2011) studied the 7 Dow Jones Islamic and conventional Indices covering the period 1996 to 2005 and concluded that the performance of conventional and Islamic stock indices is not statistically different. The Dow Jones Islamic indices beating their conventional counterpart during 1996 to 2000 and flounder it during 2001 to 2005. Overall, similar return, risk and diversification benefits occurring for both the Islamic and conventional indices. The analysis which is done by Mouna (2012) by taking 35 Islamic and conventional indices covering 2002 to 2012 showing that there is no significant difference between the mean returns of conventional and Islamic stocks except Australia and Italy. Muhmud and Mirza (2011) while studying the Pakistani 86 mutual funds & KSE 100 Index for the period 2006 to 2010 showing that Islamic funds are showing very high growth but unable

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to beat the KSE 100 index. There is no significance difference in the volatilities and mean generated by conventional indices and social responsible investment concluded by Shunsuke et al. (2012) by taken the sample of SRI and conventional indices of USA, UK and Japan covering the period from 2001 to 2008. Dewandaru et al. (2014) took the sample of 11 Dow Jones Islamic and 11 Dow Jones Conventional Indices and 10 global sectors during the period 2008 to 2012 showed that betas, returns and volatilities of Islamic indices of most of the countries under study are not statistically significant. They showed that mostly Islamic indices at industry level are more diversifiable compare to country level. The studies which are discussed above resulted that there is no significant difference between the performance if Islamic and conventional stocks. For this study performance of Islamic and conventional stocks will measured on the basis of return and risk. If any stock has more return or less risk than we can say that it is performing better. So, our first hypothesis will be; H1: There is no significant difference between the performance of Islamic and conventional stock markets During the period of financial crisis Islamic stocks outperform the conventional stocks has been concluded by several previous studies. Most of the studies of mutual funds showed that during financial crisis Islamic mutual funds perform better, as studying the Malaysian unit trust funds, Abdullah et al. (2007) by taking the 14 Islamic funds and 51 conventional funds covering 1992 to 2001 period resulted during the bearish market conditions Islamic funds are performing better but on the other hand during bullish market conditions conventional funds are performing better. Other study on mutual funds by Kräussl & Hayat (2008) taking 59 Islamic equity funds of global, Malaysia and other local regions during the period 2001 to 2006 examined that Islamic funds are not outperforming than Islamic benchmark and conventional benchmark but outperforming during period 2001-02 crisis. One study which is done Malaysian real estate investment by Newell and Osmadi (2009) took M-REIT index, Conventional M-REIT index and Islamic M-REIT index during the period of 2006 to 2008 resulted that Islamic real estate investment is different from conventional real estate investment. During the period of financial crisis Islamic real investment is performing better and having low risk. The study of Hesham et al. (2010) covering 12 Islamic and 16 conventional mutual funds of Saudi Arabia during the period of 2003 to 2010 conventional funds are outperforming during the period of bullish market

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conditions but during bearish market conditions Islamic funds are performing better. Bob et al. (2016) examine Islamic and conventional mutual funds of Malaysia covering period 1996 to 2013 resulted that Islamic funds are not outperforming the conventional funds during Asian crisis, and Buble.com crisis but during recent global financial crisis these are outperforming. Islamic funds are outperforming in the riskiest asset class; these are better for the risk management. The studies related to Islamic and conventional indices also showed that during financial crisis Islamic stocks show better performing. As, Khaled (2004) using FTSE global Islamic index and FTSE All-World Index during the period of 1996 to 2003 showed that during buble.com crisis of 2001-02 Islamic stocks are outperforming than conventional stocks. Alam and Rajjaque (2010) taking sample of S&P 350, S&P-Fin andShariah equities index during the period of recent global financial crisis of 2007 to 2009 revealed that Islamic stocks are outperforming the conventional stocks during crisis but underperform during growth of the economy. While taking 3 Islamic & 3 conventional Index of USA, Europe and World during the period of 2006 to 2008 by Arouri et al. (2013) examined Islamic stocks outperform the conventional during the period of financial crisis. Al-Khazali et.al. (2014) byusing stochastic dominance (SD) analysis examine the performance of nine Islamic indices and nine conventional indices covering the period 19962012. They showed that conventional indices are dominating the Islamic indices in all markets except European market. However U.S, European and Global Islamic markets index are dominating the conventional markets index during the period of recent financial crisis of 2008/09. The study of Jawadi et al. (2014) took 3 Dow Jones Islamic Index (World, U.S and Europe) and 3 conventional MSCI Index as a benchmark covering the period 2000 to 2011 and showed that the conventional indices are performing better before crisis, during and after crisis period the Islamic indices are outperforming their conventional counterpart. The study which is done on Pakistan and Indian by Rizvi and Arshad (2014) during 2001 to 2009 period and they concluded that during the period of financial crisis Islamic investment is a safer investment as compare to conventional investment. Walid et.al. (2015) took the sample of six GCC countries, the Dow jones Islamic index, gold and U.S Treasury bill rate and find that Islamic stocks and gold can be used for the purpose of hedging the downside risk during the trouble time period. So, the most of the previous studies showed that the performance of Islamic stocks is better during

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trouble time period of global financial crisis, as these are selected after rigid screening. So, our second hypothesis is: H2: Islamic stocks outperform the conventional stocks during the period of financial crisis

Methodology 1. Sample Selection This study measures the performance of conventional and Islamic capital markets on the basis of return and risk of 4 regions and 8 countries shown by table 2 and 3. The countries which have Islamic index before January 01, 2004 and weekly data is available at Google Finance and Yahoo! Finance. The study period is 12 years from January 01, 2004 to December 31, 2015 including the 1 year and 6 months 2008/09 global financial crisis period from December 01, 2007 to May 31, 2009 (About.com, The National Bureau of Economic Research and Wikipedia), table 1 shows the periods segregation. Weekly closing stock indices (stock split and dividend adjusted) of all conventional and Islamic stock capital markets are taken from Google Finance and Yahoo! Finance. Weekly return is than obtained from the weekly stock return, for any missing value the mean of before and after the missing value is taken. 3-months government treasury bond rate is taken as a proxy to risk free rate is taken for every country from the website of investing.com. Table 1 Study Periods

Time Period

Duration

Overall-period

12 Years

01-Jan-2004 to 31-Dec-2015

Crisis-period

18 Months

01-Dec-2007 to 31-May-2009

Table 2

10 Countries

Japan China Malaysia Indonesia United Kingdom Turkey U.S. A Canada

Stock Indices Islamic Conventional Islamic Conventional Islamic Conventional Islamic Conventional Islamic Conventional Islamic Conventional Islamic Conventional Islamic Conventional

Stock Indices-country level Dow Jones Islamic Market Japan Nikkei 225 Index Dow Jones Islamic Market China SSEC Index D.J Islamic Market Index Malaysia Bursa Malaysia KLCI Jakarta Islamic Index Jakarta Composite Index Dow Jones Islamic UK FTSE 100 Index Dow Jones Islamic Market Turkey BIST 100 Index Dow Jones Islamic Market US S & P 500 Index Dow Jones Islamic Market Canada S & P / TSX Composite Index

Stock indices Islamic Conventional Islamic Conventional Islamic Conventional Islamic Conventional

Indices-Regional level

Table 3 Regions Asia Europe North America World

MSCI AC Asia Pacific Islamic Dow Jones Market Asia Dow Jones Islamic Market Europe STOXX Europe 600 Index MSCI Islamic North America FTSE North America Index Dow Jones Islamic Market World The Global Dow Jones

2. Performance measurement Techniques First we convert weekly stock market indices to weekly stock returns. Then we measure the non-risk adjusted performance we use here the MV approach, the Descriptive Statistics, the simply return (mean) and risk (Standard Deviation, beta and co-efficient of variation) for this we follow the procedure of Abdullah et.al (2007) here we make the country and regional level comparison and then the comparison of 2002/03 and 2008/09 global financial crisis among countries and regions.

(a) Non-Risk Adjusted performance measures

11 Return Calculations

Ri

= ln(

Where: Ri = Monthly returns of the stock market index i. = Closing index at the end of the month of stock market index i. = Open index at the beginning of the month of stock market index i. Standard Deviation

(b) Risk adjusted measures of performance

For the measurement of risk adjusted performance measures we follow the procedure of Abullah et.al. (2007), and João et.al. (2015) these techniques are explained below: i. Sharpe Ratio (SR) or Rewards-to-Variability Ratio (RVAR) This performance measure ratio is introduced by Sharpe (1966) as an absolute risk adjusted measurement of return. a. Sharpe ratio (SR) measures the return to the total risk. b. If (SR of the Market i) > (SR of the Benchmark) this mean that market is outperforming the benchmark c. If (SR of the Market i) < (SR of the Benchmark) this mean that market is underperforming the benchmark

Sharemeasure Ratio (SR) =  Sharpe Where:

Ri  R f SDi

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Ri bar = Average return of the stock market index i over the period t. Rf = Risk-free rate on govt. treasury bill SDi = Standard Deviation of the return of stock market index i during the period t. ii. Treynor Ratio (TR) or Rewards-to-Volatility Ratio (RVOL) The Treynor ratio which is derived by the Treynor (1965), measures return to systematic risk (security beta). This ratio can be used to measure performance of single security and for portfolio. Ri  R f TreynorTreynor measure = Ratio (TR)

i

And

Where: Bi = beta of the stock market index i during period t. If (TR of Market i) > (TR of Benchmark) this mean market index i is striking the benchmark If (TR of Market i) < (TR of Benchmark) this mean market index i is underperforming the benchmark iii. Jensen’s Alpha Return Measure Jensen (1968) introduced this measure which is very famous for the measurement of the performance of the portfolios. It gives excess return by taking risk. [Ri−Rf] = αp + βp[Rb−Rf] + εp αp = [Ri−Rf] -βp[Rb−Rf] + εp Where: [Ri−Rf] = Excessive return of stock market index “i” from risk free rate of return at time “t” [Rb−Rf] = Excessive return of benchmark “b” from risk free rate of return at time “t”

Results and Discussion Non-Risk adjusted performance measure results

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In non-risk adjusted performance we will measure the performance of Islamic and conventional indices on the basis of mean return and standard deviation. First we compare the performance of Islamic and conventional indices during the whole study period from January 01, 2004 to December 31, 2015 than we analysis the performance of both type of stock markets during the period of global financial crisis of 2008/09. The period for this global financial crisis in this paper is taken from December 01, 2007 to May 31, 2009. The performance of Islamic and conventional stock markets then compared with each other with two independent sample t-test. Table 4: Overall Period Countries & Regions CANADA CHINA INDONESIA JAPAN KUWAIT MALAYSIA TURKEY UK USA ASIA EUROPE NORTH AMERICA THE WORLD

Islamic-Indices Mean S.D 0.00036 0.00089 0.00224 0.00052 -0.00160 0.00146 0.00199 0.00038 0.00127 0.00060 0.00075 0.00104 0.00096

0.04240 0.03962 0.03822 0.02687 0.02870 0.02106 0.03442 0.03136 0.02345 0.01693 0.03006 0.01640 0.02599

Conventional-Indices Mean S.D 0.00072 0.00152 0.00299 0.00086 0.00028 0.00125 0.00213 0.00052 0.00098 0.00093 0.00074 0.00096 0.00108

0.02405 0.04036 0.03185 0.03043 0.02139 0.01776 0.03799 0.02485 0.02427 0.02913 0.02654 0.04214 0.02897

T Stat -0.18223 -0.53102 -0.19998 -0.22763 -0.21283 0.19195 -0.10800 -0.08564 0.21817 -0.23936 0.00739 0.04613 -0.07634

Table 4 represents the mean and standard deviation during the whole study period from January 01, 2004 to December 31, 2015. Mean represents mean of the weekly return of the indices and SD representing the standard deviation of the weekly return. Tstatistics is two samples t-test for comparing the mean return of Islamic and conventional indices. * represent 5% level of significance respectively. The total observations for this data series are 626.

The results of table 4 show the return and standard deviation during the whole study period of 9 countries and 4 regions. If we compare the return of both Islamic and conventional indices during the whole study period as shown by table 4, there is no significance difference between the performance of Islamic and conventional stock markets as same by (Jawadi et al., 2014). The Islamic indices of Malaysia, USA, Europe and North America are beating the conventional indices statistically insignificantly, but on the other hand the conventional indices of other countries and regions are outperforming the Figure 1

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Figure 1 is showing the weekly mean return of both Islamic and conventional indices during the whole study period.

Figure 2

Figure 2 is showing the standard deviation of the weekly return of both Islamic and conventional indices during the whole study period.

Islamic indices although the conventional index of the world is beating the Islamic index but insignificantly. The mean return of the Islamic stock market of Kuwait are going to negative. Both conventional and Islamic stock markets of Indonesia are beating the whole sample which provide the weekly mean return about to 0.00299 and 0.00224 respectively. Figure 3

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Figure 3 is representing the trend of the weekly return of both Islamic and conventional indices during the whole study period.

Figure 4

Figure 4 is representing the trend of the weekly return of both Islamic and conventional indices during the whole study period.

If we analysis the standard deviation of the weekly return of both Islamic and conventional stock markets during the whole study period. Islamic stock indices of Canada, Indonesia, Malaysia, UK, Kuwait and Europe showed more standard deviation which mean the Islamic market of these countries are riskier than conventional markets remaining countries and regions

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representing more risk in conventional markets on the basis of standard deviation. If we make overall analysis of the World stock market which show that conventional stock index is riskier than Islamic index. The overall results of table 4 and figure 2 revealed that Islamic stock markets are less risky as compare to conventional stock markets as if we make the regional analysis only the Europe which is showing more standard deviation in Islamic stock market but other three regions, i.e. Asia, North America and the World show that Islamic stocks are less risky. On the analysis of the trend of the return of both Islamic and conventional stock markets which is represented by figure 3 and figure 4. If we analysis the figure 3 which represents the trend of the weekly return of Islamic indices show that during the crisis period from May 01, 2009 the return decreased regularly and go to negative until the end of the crisis. in February and March of 2009 the aggregate return of Islamic stock markets was very worst as shown by figure 9 it was about to -0.3000. this proved that crisis hit a lot to the stock markets.But if we analysis the conventional stock market trend shown by figure 4. It showed during the period of global financial crisis of 2008/09 it goes to negative more than Islamic stock market because at the lowest point it is showing that the aggregate return was about to -0.5000 per week. This confirmed that crisis hit more to conventional indices as compare to Islamic stock indices. At the time of the peak period of crisis markets go down very badly. The results of the non-risk adjusted performance measures during the whole study period revealed that there is no significance difference between the performance of Islamic and conventional indices significantly. In some countries and regions Islamic stock markets performed better and in some stock markets conventional done better but their results are not significant. The world index which represent the stocks from all around the world show that conventional stock markets are slightly performing better but insignificantly. But on the other hand in term of standard deviation mostly the conventional stock markets are riskier than Islamic markets. If we see the standard deviation of the world stock market which show that Islamic stock market is slightly less risky than conventional stock market. So the conclusion from the whole period is that overall conventional stock market is slightly better in term of weekly return but Islamic stock market is better in term standard deviation the total risk because in Islamic stock there some restriction imposed by Islamic law that why low return low risk. Table 5 Crisis

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Countries & Regions CANADA CHINA INDONESIA JAPAN KUWAIT MALAYSIA TURKEY UK USA ASIA EUROPE NORTH AMERICA THE WORLD

Islamic-Indices Mean S. D -0.00388 -0.00680 -0.00597 -0.00542 -0.00729 -0.00419 -0.00309 -0.00594 -0.00469 -0.00652 -0.00642 -0.00485 -0.00490

0.08030 0.07599 0.06698 0.04725 0.05153 0.03937 0.05427 0.05400 0.04209 0.02101 0.05349 0.01416 0.04623

Conventional-Indices Mean S. D -0.00356 -0.00833 -0.00339 -0.00607 -0.00568 -0.00324 -0.00570 -0.00482 -0.00612 -0.00517 -0.00682 -0.00867 -0.00645

0.04835 0.05901 0.05498 0.05123 0.03286 0.02806 0.05648 0.04758 0.04666 0.05218 0.04543 0.09044 0.05451

T-Stat. -0.03004 0.14124 -0.26313 0.08217 -0.23316 -0.17328 0.29448 -0.13786 0.20069 -0.21219 0.05053 0.36858 0.19164

Table 5 represents the mean and standard deviation during the crisis period from December 01, 2007 to May 31, 2009. Mean represents mean of the weekly return of the stock indices and SD is the standard deviation of the weekly return. T-stat is two samples t-test for comparing the mean return of Islamic and conventional indices. * represent 5% level of significance respectively. The total observations for this data series are 78.

The results of crisis period are shown by table 5, figure 5 and 6. Table 5 shows the weekly mean return and standard deviation of both Islamic and conventional stock markets, and figure 5 and 6 showing the graphical look of weekly mean return and standard deviation of the weekly return of Islamic and conventional stock markets respectively during crisis period. During the period of global financial crisis, the Islamic stock markets of China, Japan, Turkey, USA, Europe, North America and the World beat the conventional stock markets. But this outperformance is not significant. All the return for both Islamic and conventional gone to negative as shown by table 5 and figure 5. The conventional indices of North America and China go to negative more i.e. 0.00867 and -0.00833 respectively. The Islamic stock indices of China and Kuwait go more negative i.e. -0.00729 and -0.00680 respectively. The regional level stock market indices revealed that only Asia is the region where conventional stock index is performing better than conventional during crisis in other remaining regions the Europe, North America and the World where the performance of Islamic stock markets is better than conventional during the period of global financial crisis. During the whole study period the performance of conventional stocks was better as we discuss in the above section. So, during the period of global financial crisis the performance reversed and the Islamic stocks are beating the conventional stocks in term of weekly return. Same results are shown by (Rizvi and Arshad, 2014;Alam and Rajjaque, 2010)

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Figure 5

Figure 5 is representing the weekly return of both Islamic and conventional indices during the period of global financial crisis period of 2008/09

Figure 6

Figure 6 is representing the standard deviation of the weekly return of both Islamic and conventional indices during the period of global financial crisis period of 2008/09

The standard deviation during the period of global financial crisis show mixed results for country level data Canada, China and Indonesia show more standard deviation in Islamic indices as compare to conventional indices. Kuwait, Turkey and UK also show more standard deviation in

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the weekly return of Islamic stocks. The regions show that conventional stocks are riskier than Islamic stocks except Europe shown by figure 6. So, the overall analysis showed that the World index which represents the stocks from all over the world revealed that conventional stocks are riskier than Islamic stocks as same results were during the whole study period.

Risk adjusted performance measurement results Table 6: Overall Period Countries & Regions CANADA CHINA INDONESIA JAPAN KUWAIT MALAYSIA TURKEY UK USA ASIA EUROPE N. AMERICA THE WORLD

The Sharpe-Ratio

The-Treynor Ratio

The Jensen's Alpha

Islamic Conv T-Stat Islamic Conv T-Stat Islamic Conv T-Stat 0.001 0.016 -7.91* 0.000 0.004 -2.14* 0.000 0.000 -0.35 0.009 0.024 -6.52* 0.000 0.002 -0.70 0.000 0.001 -0.21 0.019 0.046 -13.3* 0.001 -0.015 7.75* 0.002 0.001 0.06 0.018 0.027 -5.56* 0.001 0.007 -4.21* 0.000 0.001 -0.42 -0.070 -0.006 -40.7* -0.008 -0.001 -4.42* -0.002 0.000 -1.17 0.039 0.034 4.26* 0.002 0.015 -11.8* 0.001 0.001 0.22 -0.010 -0.005 -2.20* 0.000 -0.007 3.12* 0.001 0.000 0.44 -0.002 0.003 -3.13* 0.000 0.001 -0.48 0.000 0.000 -0.26 0.044 0.030 10.11* 0.021 0.012 6.89* 0.001 0.001 0.22 -0.015 0.002 -12.9* -0.001 0.000 -0.65 0.000 0.000 0.12 -0.021 -0.024 2.02* -0.001 -0.001 0.08 0.000 0.000 0.11 0.046 0.016 16.5* 0.002 0.001 0.94 0.001 0.000 0.40 0.004 0.008 -2.36* 0.000 0.000 -0.07 0.000 0.000 0.00

Table 6 represents the risk adjusted performance measures, the Sharpe ratio represents the excess return from risk free rate against total risk, the Treynor ratio which measures the excess return by the stock from risk free rate against market risk and the Jensen’s alpha measures how much excess return actually earns and how much should be earned from risk free rate of return. The time period for this study is from January 01, 2004 to December 31, 2015. * representing the 5% level of significance.

The results of risk adjusted performance measures are shown by table 6. The Sharpe ratio which shows the excess return of a stock market from risk free rate against the total risk i.e. standard deviation. According the Sharpe ratio performance measure mostly conventional stock are beating the Islamic stocks. The Malaysia and USA are from country level data where Islamic stocks are beating conventional stock during the whole study period significantly at 5% level of significance. The regional level stock markets of Asia and the World show that conventional stock markets are beating the Islamic stock markets significantly and the Islamic stock markets of Europe and North America are outperforming significantly. The conclusion of Sharpe ratio shows that the world stock market show that conventional stocks are beating the Islamic stock significantly.

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The Treynor ratio considered market risk only as the Sharpe ratio considered the total risk. In Sharpe ratio standard deviation is considered as a risk but in Treynor ratio the beta considered in the ratio. Standard deviation represents the total risk and beta represents the market risk. The results of Treynor ratio showed that at country level data mostly conventional stocks are beating the Islamic stocks significantly except the Indonesia, Turkey and USA where Islamic stocks are outperforming the conventional stocks during the whole study period significantly. USA where Islamic stocks are performing better according to both Sharpe ratio and Treynor ratio. At regional level same results as are shown by Sharpe ratio also showing the Treynor ratio but the results of Sharpe were statistical significance and the results of Treynor ratio are not significant. The Islamic stock markets of Europe and North America are showing the better than conventional but this performance is not significant. On the other hands, Asia and the world showing that conventional stocks are performing better but this performance is not significant. The conclusion from Treynor ratio is that mostly conventional stocks are performing better except USA, Turkey and Indonesia significantly. The performance of Islamic stocks in USA is better and USA is the part of North America stock index to so, North America is also performing better. The Jensen’s Alpha which represents how much excess return are generating by stock markets from risk free rate of return and who much excess return they should earn. Jensen’s Alpha show that the performance of Islamic and conventional stocks in not statistically significant for any country and region but mostly conventional stocks are performing better during the whole study period as shown by table 6. The conventional stock markets ofCanada, China, Japan, Kuwait and UK are outperforming the Islamic stock markets but insignificantly. Islamic stock markets of Indonesia, Malaysia, Turkey and USA are beating the conventional indices but results are not statistically significant. Among the regions North America beating Islamic stocks to conventional but other three regions the Asia, Europe and the World showing same results. Overall results of risky adjusted performance measures show that Islamic stocks of Malaysia, Indonesia, USA, Europe and North America are significantly outperforming the conventional stocks and in remaining countries and regions conventional stocks are performing better. The world stock market mostly better in conventional stocks. Table 7- Crisis

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Countries & Regions CANADA CHINA INDONESIA JAPAN KUWAIT MALAYSIA TURKEY UK USA ASIA EUROPE N. AMERICA THE WORLD

The Sharpe-Ratio

The Treynor-Ratio

The Jensen's Alpha

Islamic Conv. T-Stat Islamic Conv. T-Stat Islamic Conv. T-Stat -0.053 -0.081 2.67* -0.009 -0.026 1.61 -0.002 -0.003 0.08 -0.097 -0.151 4.95* -0.006 -0.022 1.51 0.002 -0.007 0.74 -0.119 -0.098 -2.14* -0.008 0.078 -8.74* 0.001 -0.006 0.66 -0.117 -0.120 -0.45 -0.007 -0.049 -5.35* 0.000 -0.005 0.65 -0.152 -0.190 5.41* -0.024 -0.026 0.24 -0.006 -0.005 -0.10 -0.123 -0.138 2.87* -0.012 -0.067 10.0* -0.002 -0.004 0.29 -0.092 -0.135 4.81* -0.007 -0.067 6.74* 0.001 -0.007 0.86 -0.123 -0.115 0.87 -0.006 -0.043 4.56* 0.001 -0.005 0.68 -0.117 -0.136 2.69* -0.061 -0.067 0.96 -0.005 -0.006 0.14 -0.357 -0.118 -37.6* -0.050 -0.007 -6.63* -0.007 0.000 -1.05 -0.144 -0.179 4.34* -0.008 -0.010 0.26 -0.002 -0.002 0.01 -0.363 -0.099 -25.5* -0.048 -0.007 -3.97* -0.005 0.000 -0.43 -0.126 -0.135 1.15 -0.007 -0.007 0.05 -0.001 0.000 -0.12

Table 6 represents the risk adjusted performance measures, the Sharpe ratio represents the excess return from risk free rate against total risk, the Treynor ratio which measures the excess return by the stock from risk free rate against market risk and the Jensen’s alpha measures how much excess return actually earns and how much should be earned from risk free rate of return. The time period for this study is from December 01, 2007 to May 31, 2009 which the period of crisis in this study. * representing the 5% level of significance.

During the period of global financial crisis, the Islamic and conventional stock market of every country and region showing negative returns. Islamic stock markets are outperforming the conventional stock markets according to risk-adjusted performance measures during the period of global financial crisis shown by table 7. The same results are shown by (Alam and Rajjaque, 2010).The Sharpe ratio showed that Islamic stock market during the period of global financial crisis beating the conventional stock market significantly. The Islamic stock markets of Canada, China, Kuwait, Malaysia, Turkey, USA and Europe showing significantly better performance. Only the Indonesia at country level where conventional stocks are beating the Islamic stocks significantly. From regional level conventional stock markets are beating the Islamic stock markets. The world stock market show that during crisis according to Sharpe ratio the performance of Islamic stock markets is slightly better than conventional stocks market but insignificantly.The Treynor ration conclude the same results as the Sharpe ratio, during the period of crisis Islamic stock markets of Canada, China, Kuwait, Malaysia, Turkey, USA and Europe showing significantly better performance. At country level conventional stock markets of Indonesia and Japan are beating Islamic stocks. At regional level conventional markets of Asia North America are beating the Islamic stock markets as these are also showing same results according to Sharpe ratio. The performance of Islamic stock markets of Europe and the World is

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slightly better than conventional during crisis but insignificantly. The Jensen’s alpha results revealed that Islamic stock markets are outperforming during the global financial crisis but this performance is insignificant. All the countries are performing slightly better in Islamic stock except Kuwait where conventional stocks performance is better. The results from the risk adjusted performance of Islamic and conventional stock markets during global financial crisis show that all the measures which are used for the measurement of performance of Islamic and conventional stocks showed about same results. Most of the countries and regions Islamic stocks are beating the conventional stocks except the Indonesia and Asia where conventional stocks are performing better.Islamic stocks are less risky that’s why less affected by the crisis because during the stage of qualitative and quantitative screening the risky companies like conventional bank, conventional insurance companies etc. are excluded from the Islamic stocks and in second stage of screening more debt base companies are also excluded from the Islamic stocks. So, Islamic stocks are the stocks of less risky companies that came from some sort of screening which is imposed by Law.

Conclusion and Research Implications This study investigated the performance of Islamic and conventional stock markets during the period from January 01, 2004 to December 31, 2015 including the period of global financial crisis from December 01, 2007 to May 31, 2009. 9 countries and 4 regions are included in the sample for this study. We applied non-risk adjusted and risk adjusted performance measurement techniques for measurement of the performance of Islamic and conventional stocks. Two sample independent t-test applied for the comparison of both type of stock markets. For the measurement of the performance Islamic and conventional stock indices of every country is used. The results of this study revealed that during the whole study period conventional stock markets are outperforming the Islamic stock markets but this performance is not statistically significant by applying the non-risk adjusted performance measurement techniques except Malaysia and USA. If the performance is measured by the risk adjusted performance measures, the Sharpe ratio, the Treynor ratio and Jensen’s alpha show that in most of the countries and regions conventional stock markets dominating the Islamic stock markets statistically significantly

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during the whole study period. The world stock index show that conventional stock markets are beating the Islamic stock markets during the whole study period by applying both type of techniques, the risk adjusted and non-adjusted techniques. The results of overall period are confirmed with (Jawadi et al.,2014;Al-Khazali et.al., 2014;Dewandaru et al., 2014Mouna,2012). During the period of global financial crisis by applying non-risk adjusted techniques Islamic stocks are beating conventional stocks but the results are not significant, these results confirmed with (Rizvi and Arshad, 2014 and Alam and Rajjaque, 2010). If we see the world stock market indices Islamic stock market outperformed the conventional stock market. With the results of risk adjusted performance, the Sharpe ratio, the Treynor ratio and Jensen’s alpha, the Islamic stock markets outperforming the conventional stock markets statistically significantly. So overall results revealed that during the overall period of study conventional stocks are performing better and during the period of global financial crisis Islamic stocks are performing better. Conventional stocks have no restriction that’s why performing better during whole study period. Islamic stocks selected after some screening and due restrictions some sectors and risky companies are excluded from the selection of Islamic stocks that’s why the performance of Islamic stock become better during crisis period. This study will help the portfolio managers for the selection of stocks for making the optimal portfolio with the consideration of time period. Islamic stocks can be used for the purpose of hedging the downside risk because during the period of global financial crisis Islamic stocks performance is better than conventional stocks. This study covered the time period of 12 years from 2004 to 2015 and consists of 9 countries and 4 regions due to limited Islamic stock market indices. For future it is recommended that most countries if included in the sample and with for more time period data if collected can give more accurate consequences for the investors and policy makers. This study covered only the equity type of capital markets if in future debt market will included than it will show very useful information for investors and policy makers.

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