Essays on Islamic Assets

This thesis consists of three quantitative studies of Islamic and conventional assets in Islamic and non-Islamic countries. The studies explore the performance characteristics as well as the impact of macroeconomic news surprises and the Global Financial Crisis (GFC) on these assets. First, I use a unique Malaysian dataset to identify individual Islamic and non-Islamic stocks and find that Islamic stocks provide similar returns at a lower risk than non-Islamic stocks. As such, the Islamic portfolio is closer to the mean-variance efficient frontier and the minimum variance portfolio, relative to the non-Islamic portfolio. These results are driven by financial ratio screens, which exclude firms with large debt or income from interest from Islamic stock portfolios. Second, using a dataset which covers macroeconomic data and stock and bond indices in three Islamic and eight non-Islamic countries, macroeconomic surprises have a similar impact on the returns and volatility of both Islamic and conventional stocks and bonds. Third, in a sample of stock and bond indices in 11 Islamic and eight non-Islamic countries the GFC has a negative impact on most stock returns, but not on bond returns. There are benefits of Islamic assets during the GFC, particularly during the early stage of the crisis, because Islamic institutions are prohibited from holding sub-prime mortgage securities and derivatives. The strongest benefits are in the UK and US. This thesis adds to the emerging body of quantitative research on Islamic assets and suggests that there are potential benefits of risk reduction and stability for Islamic assets, particularly during a financial crisis. However, Islamic assets react to macroeconomic surprises in a similar way to conventional assets, and are not immune to economic recessions.