Idiosyncratic Risk of Investing in Islamic Capital Market Equities
Posted: 16 Dec 2012 Last revised: 19 Mar 2015
Date Written: December 15, 2012
This paper investigates the idiosyncratic risk of investing in the Islamic capital market equities. It aims to answer the question: do stocks which are included (excluded) in the Shari’ah index have higher (lower) idiosyncratic risks? We used FTSE Bursa Malaysia EMAS Shari’ah Index (FBMEI) launched in 2007 to investigate whether stocks added and deleted from this Shari’ah compliant index had higher or lower idiosyncratic risks. The estimation results show that, the idiosyncratic risk of stocks added to the FBMEI was high during the bearish market and low during the bullish market. Our estimation results from a rolling CAPM regression show that, on average idiosyncratic risk for the stocks deleted from the FBMEI is relatively higher compared to idiosyncratic risk for the stocks added to the FBMEI. Stocks added (deleted) had higher (lower) idiosyncratic risks during the index revisions prior to June 2009. Our findings also suggest that there is a relationship between VaR and idiosyncratic risk.
Keywords: Idiosyncratic risk, Islamic capital market equities
JEL Classification: G10
Suggested Citation: Suggested Citation