Experience of equity-based Islamic shares in Pakistan

Abstract

The performance of equity-based Islamic and non-Islamic stocks in Pakistan is investigated between July 1988 and December 1994. Weekly stock price behaviour is compared for the two types of stocks during sub-periods of reforms. July 1988 to June 1991 and July 1991 to December 1994. The risk premia for equity-based Islamic stocks have been lower than for the non-Islamic stocks. The returns of equity-based Islamic stocks declined after the tax exemption on these stocks are withdrawn. The volatility in returns and persistence in volatility was evident only in leasing stocks. The time-varying risk premia model provided evidence of significant relationship between risk and return only for Modarabah stocks during the first sub-period of reforms. Neither Islamic nor non-Islamic stocks indicated any volatility in returns during the first sub-period of reforms. No significant mean-variance relationship was evident for equity-based Islamic and non-Islamic stocks during the second sub-period of reforms. Only equity-based Islamic stocks indicated volatility in returns and an indication of increase in future volatility in returns during this sub-period. The results also indicate that the forecast of volatility in returns of Islamic stocks also affects the forecast of volatility in returns into indefinite future during the later period of reforms.