Islamic Capital Markets: An Exploratory Study on Investor Rationality

Abstract:     
A growing majority of researchers now concede that sentiments of investors do affect stock prices, thus challenging the traditional view that fluctuations in stock pricing stem from solely changes in fundamentals. While these researchers have focused on conventional capital markets; one fast growing industry that has not been subjected to such research is that of Islamic Finance. This research proposal aims to subject the Islamic Capital Markets to theoretical and empirical research, using both qualitative and quantitative methodologies, in order to validate and provide frameworks for testing investor sentiments as applicable in the Islamic Finance Context. For that effect, the paper proposes to; 1) validate and provide an investor sentiments framework that shall measure the levels of investors’ sentiments prevalent in the Islamic capital markets. 2) Construct an Islamic Investor Sentiments Index using the validated framework. 3) Use the Islamic Investor Sentiments Index in order to investigate the affects from investors’ sentiments on Islamic markets performances. The data from qualitative surveys, to be used in order to validate the framework, is expected to generate further hypotheses based on conceptual ideas. Vector auto regressions (VARs) models are to be employed to study the effects from investor sentiments on the stock pricing in Islamic Capital Markets.

Number of Pages in PDF File: 21

Keywords: Investors Sentiments, Behavioural Finance, Islamic Finance

working papers series