Capital Asset Pricing Model and Pricing of Islamic Financial Instruments

19 Pages Posted: 31 Oct 2017

See all articles by Shabir A Hakim

Shabir A Hakim

Effat University

Zarinah Hamid

International Islamic University of Malaysia (IIUM)

Ahamed Kameel Mydin Meera

International Islamic University of Malaysia (IIUM)

Date Written: January 2016

Abstract

The prohibitions of ribā (interest) and trading in non-ḥalāl businesses in Islam redefines investment universe assumed by Capital Asset Pricing Model (CAPM). In Islamic investment world, risk-free asset and market portfolio with non-ḥalāl constituents are irrelevant. We propose two-versions of Sharīʿah-compliant CAPM that use Sharīʿah-complaint market portfolio and are free of risk-free asset. We test the proposed models together with conventional CAPM in Bursa Malaysia using three- and ten-year data. The test results of the models with three-year data reveal remarkable similarity between versions of Sharīʿah-compliant models. Besides, Sharīʿah-compliant CAPM is as capable of explaining returns on Sharīʿah-complaint stocks as conventional CAPM is of explaining returns on all stocks.

Keywords: Asset pricing, Sharīʿah-compliant CAPM, Sharīʿah-compliant zero-beta portfolio, Sharīʿah-compliant market portfolio, Islamic financial instruments

JEL Classification: G11, G12, G15

Suggested Citation

Hakim, Shabir A and Hamid, Zarinah and Mydin Meera, Ahamed Kameel, Capital Asset Pricing Model and Pricing of Islamic Financial Instruments (January 2016). Journal of King Abdulaziz University: Islamic Economics, Vol. 29, No. 1, 2016, Available at SSRN: https://ssrn.com/abstract=3061734

Shabir A Hakim (Contact Author)

Effat University ( email )

P.O.BOX 34689
Jeddah, 21478
Saudi Arabia

Zarinah Hamid

International Islamic University of Malaysia (IIUM) ( email )

P.O. Box 10
Jalan Gombak
Kuala Lumpur, selangor 50728
Malaysia

Ahamed Kameel Mydin Meera

International Islamic University of Malaysia (IIUM) ( email )

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