Performance, risk profile and diversification potential of Islamic Equity Indices : a comprehensive study of the indices of the S&P BMI Shariah Series

While the Muslim population worldwide account for more than a fifth of the total population, the level of assets under management in Islamic banks, despite an impressive growth in the recent years, fails to keep up. Western Financial institutions, such as S&P, have started computing Islamic indices in order to help Muslim investors assess the quality of their investments in the stock market. There has been an ongoing debate about whether the more conservative approach of Islamic finance enabled Muslim investors to reach the same level of performance and risk as more conventional investors. Through the analysis of the BMI Shariah Index Series computed by S&P between July 2009 and June 2015, we discover that it is actually possible for Muslim investors to invest in Shariah-compliant equities without being penalized. They do not earn a return lesser than regular indices and even tend to be less risky. The returns of the Islamic and regular indices are not different from one another. The majority of Islamic indices have a variance lower than the one of their equivalent and this result is significant for 3 of them. We also find that, out of sixteen, only seven pairs of indices are cointegrated and thus move together in the long-term. This is a sign that Islamic indices can possibly move away from their conventional equivalent. The potential investor must bear this conclusion in mind.Master [120] en Ingénieur de gestion, Université catholique de Louvain, 201