Investment performance of Jakarta Islamic Index (JII) stocks.

The objective of this study is to assess comprehensively the investment performance, trading activity and volatility of Jakarta Islamic Index (JII) stocks. JII is the index on the Indonesian Stock Exchange that is composed of Sharia-compliant stocks (stocks of companies whose methods and practices are in compliance with Sharia law). JII stocks have unique characteristics – other than those that set them apart because of their basis in Islamic principles.These stocks have high levels of market capitalisation and high liquidity. In the Indonesian context, JII stocks are liquid ‘blue chip’ stocks. Unlike other investments where ethical stocks are smaller, illiquid and volatile, Indonesian ethical investing via JII stocks is unlikely to hurt investment performance per se. Current literature on Sharia investment has not included the liquidity issue in theirmodel to assess stock performance. Therefore, in this study, a comprehensive study of this issue has been conducted using the extended model of the Capital Asset Pricing Model (CAPM) using the Fama and French three-factor model augmented with liquidity. A second feature of this study is that the volatility of JII stocks as compared to other stocks was investigated. The impact of the Global Financial Crisis (GFC) on JII stocks was also examined. Finally, the effect of stocks entering and leaving the JII on return performance, trading activity and spread was assessed. The empirical findings of this study provide some valuable insights for finance academics and practitioners, especially those with an interest in Islamic finance. First, it was found that there was no difference in performance between JII and non-JII (Sharia and non-Sharia) stocks. Second, weak empirical evidence was found indicating that JII stocks exhibit lower levels of volatility when compared to non-JII stocks. Third, it was found that during the GFC, after the announcement of the suspension of trading on the Indonesian Stock Exchange (IDX), Trading Volume Activity (TVA) of JII stocks experienced a decrease when compared to non-JII stocks. This finding is consistent with the view that in the wake of bad news, investors sell more of their holdings of risky stocks (non-Sharia stocks) in order to avoid losses. However, these effects were not statistically significant. Finally, the effect of stocks entering and leaving JII supported the price pressure hypothesis. Overall, the study reports evidence consistent with the view that investors’ decisions to buy stocks has been driven more by the performance of stocks rather than by the extent of their ethical compliance