Risk and ethical investment: Empirical evidence from Dow Jones Islamic indexes

This paper contributes to the literature on the impact of the Shari’ah filtering criteria on the risk of Dow Jones Islamic indexes relative to their conventional counterparts. We show that Islamic and conventional indexes are affected by the same extreme events which can bias the estimation of the risk, especially the period of the Global Financial Crisis of 2007–2008 and its aftermath which is characterized by a very high level of volatility. Then, we examine whether the Islamic indexes are more risky than the conventional indexes using different risk measures. We also analyze the performance of both indexes from various risk-adjusted performance measures. Overall, the Islamic indexes seem to be more risky than their conventional counterparts as well as exhibit a higher performance on the full period (1996–2013). The sample period is further divided into low volatility period and high volatility period based on the detection of structural breaks in the volatility. The results also show that both indexes have been affected by variance changes. We show that most of the Islamic indexes have higher level of risk than the conventional indexes, whatever the sub-periods. Consequently, this finding means that the Islamic indexes are riskier than the non-Islamic indexes. We also find that in most cases the Islamic indexes either outperform the non-Islamic indexes or there is no significant difference in performance between both indexes. These findings can be explained as a consequence of less diversification in Islamic indexes, leading to higher concentration risk in some sectors, such as basic material, industrial and technology firms. Further, we find some differences of risk and performance between the jurisdictions.