Impact of Ethical Screening on Risk and Returns: the Case of Constructed Australian Islamic Stock Indexes

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Impact of Ethical Screening on Risk and Returns: the Case of Constructed Australian Islamic Stock Indexes

Basic Research Question

The aim of the proposed study will be to verify whether the Shariah screening process of the companies that are listed on Australian Security Exchange (ASX) leads to a riskier universe of the stocks to invest in and whether the Shariah compliant stocks usually underperform (outperform eventually) other conventional stocks or not.

Key Papers (Literature Review)   

Bousalam and Hamzaoui (2016) carried out a study that critically underpin the topic of the impact of the ethical screening on the risk and the returns. The aim of their study was to investigate whether the Shariah screening process of the companies that are listed on the Casablanca Stock Exchange (CSE), could results to the a riskier universal stock that an investor can invest in. the study also aimed at looking at whether the Shariah compliant stocks underperform in comparison to the other conventional types of stock. The meet the objective the study first applied the Shariah screening methods that are set by global leading market proxy (indices) such S&P Global BMI Sharia Index. , and Dow Jones Islamic market World index to the 74 companies that were listed on the CSE to filter out the Shariah-compliant stocks. The study found out that the returns of the Moroccan Islamic Indices were relatively higher and volatile in comparison to that of Moroccan All Shares Index (MASI). The study concluded that the investors in the Shariah-complaint stocks do not usually make a sacrifice of financial performance for their investment risk.

In 2005, Hassan, Antoniou and Paudyal investigated the potential of impact of applying financial and Shariah criteria in selecting an investment that is complaint with investors’ beliefs and value system, to the performance of the investment. The paper compared the performance characteristic of the Shariah compliant and Islamic screened indices and stock portfolio with that of the of the conventional benchmark portfolio. One difference between this study and other studies looking at the same topic was that it examined the performance of Islamic ethical portfolio that was not subject to the confounding effects of the management fee, transaction costs, or the different in the policies of investments which are associated with actively managed funds. In contrast to the findings by the Bousalam and Hamzaoui (2016), Hassan, Antoniou and Paudyal (2005) found out that the use of Islamic ethical screening does not necessarily lead to an adverse impact on the performance of investment. The study thus rejected the hypothesis that the expected returns from the Islamic screened portfolios are lower compared to the expected returns of the conventional portfolio.

According to Hussein (2004), application of the Islamic ethical screening on the portfolio does not necessarily to a negative effect on the FTSE Global Islamic Index performance. In their research, they employed empirical test on to whether the returns that are earned by those investors who purchase shares that form the component of FTSE Global Islamic Index shows any significant difference in the returns that is received from the companies that form the component of FTSE All-World Index. The research divided the sample period into the bear period and bull period. The risk adjusted and raw performance of the Islamic index components, and that of the all world FTSE Index indicated that both components performed in a similar manner depending on the general market performance. The study, however, made an observation that the in the bull market period the Islamic index had statistically significant positive abnormal returns, even though it underperformed the conventional index during the bear period. In overall, the study concluded that the Islamic ethical screening for the stock portfolio does not have a significant effect on the aggregate performance of the portfolio as argued in some studies.

Reddy and Fu (2014) sought to investigate whether in contrast to the common notion that Shariah complaint stocks underperforms, these stocks perform better compared to the conventional ones. They investigated the performance of the Shariah compliant stocks compared to the conventional ones listed in the……………………

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