1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Research Hypothesis
1.5 Justification of the Study
1.6 Scope and limitations of the Study
1.7 Organization of Chapters
2.1 Introduction
2.1.1 Risk
2.1.2 Return on Investment
2.1.3 Risk–Return Trade-Off
2.1.4 Stock market Index
2.1.5 Islamic Equity Investments
2.1.6 Screening for Shariah-Compliant Stocks
2.2 Theories of Portfolio Investment
2.2.1 The Modern Portfolio Theory (MPT)
2.2.2 Capital Asset Pricing Model (CAPM)
2.2.3 Arbitrage Pricing Theory (APT)
2.2.4 Market Efficiency Theory (MET)
2.3 Volatility as Proxy for Risk
2.4 Summary
2.5 Empirical Literature

2.5.1 Diversification Opportunities
2.5.2. Studies on Risk-Return of Conventional and Islamic Indices
2.5.3. Studies on Volatility of Conventional and Islamic Indices
2.5.4. Studies on Macroeconomic Variables and Stock Returns
2.6. Theoretical Framework

3.1 Introduction
3.2 Conceptual Framework
3.3 Data Sources
3.4 Variables Measurement
3.5 Model Specification
3.6 Model on Macroeconomic Variables
2.7 Estimation Techniques
2.7.1 Unit Root Test
2.7.2 Johansen Cointegration and Vector Error Correction Model (VECM)
2.7.3 Risk-Adjustment Return Performance
2.7.4 Summary of Models Adopted in the Study

4.1 Introduction
4.2 Trend and Descriptive Statistics
4.3 Unit Root Test
4.4 Johansen Co-integration Test
4.5 Results of Vector Error Correction Model (VECM)
4.6 Testing for ARCH Effect
4.7 Results for Selecting the Best Model
4.8 Results of US Macroeconomic Variables
4.9 Results of Risk Measurement
4.10 Results of Risk – Adjusted Return Performance

5.1 Summary
5.2 Conclusion
5.3 Recommendations

5.4 Policy Implication
5.5 Recommendations for Further Research
Coleman, B. (2021). Definition of ‘Investment Risk.

Johansen Cointegration Tests Results
Heteroscedasticity (ARCH) Tests
Results on Macroeconomic Variables

Table Page
Table 3.1: Conventional and Islamic Indices 66
Table 3.2: Macroeconomic Variables 67
Table 4.3: Descriptive Statistics of Stock Indices Returns in Selected Countries 84
Table 4.4: Descriptive Statistics of Stock Indices Returns in Selected Countries 85
Table 4.5: Descriptive Statistics of Stock Indices Returns in Selected Countries 86
Table 4.6: Descriptive Statistics of US Macroeconomic Variables 87
Table 4.7: Results for Unit Root Tests: Levels 89
Table 4.8: Lag Order Selection Criteria 94
Table 4.7:Johansen Test of Co-integration Conventional Indices 95
Table 4.8: Johansen Test of Co-integration Islamic Indices 96
Table 4.9: Results of VECM for Conventional Indices 98
Table 4.10 Results of VECM for Islamic Indices 99
Table 4.11: Heteroscedasticity Test 113
Table 4.12:Selecting the Best Model 115
Table 4.13: Parameter Estimates of the Best Fitted Asymmetric Models 116
Table 4.14: Volatility Persistence and Conditional Volatility Reaction
to Market Shock 122
Table 4.15: Regression Results of Macroeconomic Variables 123
Table 4.16: Regression Results of Macroeconomic Variables 125
Table 4.17: Regression Results of Macroeconomic Variables 126
Table 4.18 Result of Risk Measurement 128
Table 4.19: Result of Risk – Adjusted Return Performance 130
Figure Page
Figure 3.1Conceptual Framework of the Study 62
Figure 4.1:Logs of the time Series CA1, CA2, CHN1, CHN2, EU1, EU2,
IND1, and IND2 81
Figure 4.2:Logs of the time Series KWT1, KWT2, JP1, JP2, MLY1, MLY2,
QTR1, and QTR2 82
Figure 4.3:Logs of the time Series TKY1, TKY2, TWN1, TWN2, US1, and US2 82
Figure 4.4:Log of US macroeconomic variables 83
Figure 4.5: Stock Returns of Canada, China, EU and India 91
Figure 4.6: Stock Returns of Japan, Kuwait, Malaysia and Qatar 92
Figure 4.7: Stock Returns of Turkey, Taiwan and US 93
Figure 4.8:Conventional Dow Jones US (US1) 101
Figure 4.9:Dow Jones Islamic US (US2) 101
Figure 4.10:Europe conventional index FTSE/ATHEX Top 20 (EU1) 102
Figure 4.11: Dow Jones Islamic Market Europe Index (EU2) 102
Figure 4.12: Conventional Dow Jones Canada Index (CA1) 103
Figure 4.13: Dow Jones Islamic Market Canada Index (DJICA) 103
Figure 4.14: Conventional Dow Jones Japan Index USD (JPN1) 104
Figure 4.15: Dow Jones Islamic Market Japan Index (JP2) 104
Figure 4.16: FTSE DIFX Kuwait 15 Index (KWT1) 105
Figure 4.17: FTSE DIFX Kuwait 15 Index (KWT2) 105
Figure 4.18 Conventional Dow Jones Malaysia Index (MLY1) 106
Figure 4.19: Dow Jones Islamic Market Malaysia Titans 25 Index (MLY2) 106
Figure 4.20: Dow Jones Turkey Titans 20 Index TRY (TKY1) 107
Figure 4.21: Dow Jones Islamic Market Turkey Index (TKY2) 107
Figure 4.22: FTSE All-World India Index GBP (IND1) 108
Figure 4.23: FTSE Shariah India Index (IND2) 109
Figure 4.24: Dow Jones China Offshore 50 Index (CHN1) 109
Figure 4.25: Dow Jones Islamic market China/Hong Kong Titans Index (CHN2) 110
Figure 4.26: Conventional FTSE World Taiwan Index USD (TWN1) 110
Figure 4.27: FTSE Shariah Taiwan index (TWN2) 111
Figure 4.28: Conventional Ftse Difx Qatar 10 Index (QTR1) 111
Figure 4.29: FTSE DIFA Qatar 10 Sharia Index (QTR2) 112

CHAPTER ONE INTRODUCTION 1.1 Background to the Study The persistent crises in global equity markets in both developed and emerging markets necessitated the search for alternative portfolio investment assets. Crises have been witnessed in Asia in 1997, and the US and European stock markets have experienced declining equity markets. This planted the seed for flourishing Islamic financial assets as alternatives to the conventional ones. The Islamic financial assets have been floated in global stock markets including the UK, US, Canada, Malaysia, Taiwan, Qatar, China, Japan etc. (Yahya, Anis, Abdul, Hashim & Fakhzan, 2013). Prominent financial institutions in the developed countries such as HSBC, Citibank, and Morgan Stanley market Islamic assets. Similarly Islamic stocks are traded on the floors of New York Stock Exchange and London stock exchange to provide alternatives for diversification opportunities (Ho,Abd Rahman, Yusuf & Zamzamin, 2014) .

Assets in the Islamic financial industry have been growing rapidly in the last decade .

According to Hassan, Rabbani & Ali (2020) and the Islamic finance market grew to around US$ 2.4 trillion in 2018, an increase of 3% as compared to 2017. This was a radical surge from US$2.2 trillion in 2015 (Shahzad, Ferrer, Ballester & Umar 2017), US$2 trillion in 2014, 1.6 trillion in 2013, $1.46 trillion in 2012 and $1.3 trillion in 2011 respectively (Ajmi, Hammoudeh, Nguyen, and Sarafrazi, 2014; Hussain, Shahmoradi, & Turk, 2016; Nazlioglu, Hammoudeh & Gupta, 2013). About 75% of the industry concentrated in the Middle East. In a nutshell, the Islamic finance industry, including 2 Islamic capital markets, grew, on average, by 17.5% since the onset of the global financial crisis in 2008 (Hussain, Shahmoradi, & Turk 2016) .

Since many stocks performed poorly during the Global Financial Crisis (GFC) period, many researchers have argued whether the GFC has had less impact on the Shariah complaint stocks compared to the conventional stocks. Some researchers (Abbes, 2012) have also argued that the difference in performance between conventional and Islamic stocks should be minimal and some have argued that conventional stocks should outperform the Islamic stocks McGowan and Junaina‘ study (as cited in Reddy & Fu, 2014). Arshad & Raza (2013) pointed that Islamic equity index seems to be more volatile with a slight lag to conventional indices during times of economic downturns .

This can be related to the seminal work by Charles, Darne & Pop (2010) and Girard & Hassan (2008) and yet is in contrast to other researchers who found that Islamic stock indices seemed to appear less volatile during times of financial instability (Arshad & Rizvi, 2013, and Al-Zoubi & Maghyereh, 2007). In addition, it was discovered further that during the growth phase of a business cycle, Islamic indices appeared less volatile and more stable. This is a reiteration of several works such as Hakim & Rashidan (2002) and Al-Zoubi & Maghyereh, (2007) .

Charles, Steak & Pop (2011) found Islamic indices to be affected in the same way as conventional indices during the US subprime crises. In terms of risk, Al -Zoubi & Maghyereh (2007) found that Islamic indices were less risky than conventional indices, perhaps due to the screening of highly risky indices. Regarding the correlation between the indices, Rizvi & Arshad (2012) found a weak correlation of movement between conventional and Islamic, which suggests this could provide a diversification benefit to investors in conventional indices. However, Kumar & Mukhopadhyay (2002), Wong, 3 Agarwal & Du (2005) observed some correlation between different markets around the world with the possibility of the transmission of crises from one market to another .

Similarly, for Islamic indices, Majid, Meera & Omar (2007), Rahman & Sidek (2011) and Siskawati, (as cited in Saadaoui & Boujelbene, 2015) found that volatility in all the major global markets is unlikely to affect Islamic indices. On the other hand, several other studies showed that there is no empirical co-integration between Islamic indices (Karim Kassim & Arip 2010) .

Since Islamic indices are guided by the principles of the Islamic law there are strong reasons to expect them to behave differently from the conventional ones(Nazlioglu, Hammoudeh & Gupta, 2013).For instance, the principle of asset – backed paradigm excludes Islamic finance from excessive speculation on financial instruments such as derivatives and futures which have no direct linkage with physical assets. it also prohibits investing in industries that deal in alcohol, gambling, tobacco, arms etc .

(Rehman, 2009). Based on this, there should be minimal contagion and volatility transmission or risk factor between conventional and Islamic indices because due to their fundamental difference (Dridi & Hassan, 2010; Dewi & Ferdian, 2010; Chapra, 2008). .

In examining Islamic and conventional stock indices for their volatilities in different countries Arshad & Raza (2013:8) revealed that throughout the twelve-year period, Islamic indices seemed to follow a similar pattern to that of its conventional counterpart .

This indicates that the impact of business cycle movements affect the two indices in a similar manner. This allows policymakers the opportunity of clustering both stocks under the same umbrella when considering policies that may affect the financial 4 markets. They also pointed that Islamic equity index seems to be more volatile with a slight lag to conventional indices during times of economic downturns .

Arshad and Raza (2013) discovered conventional indices perform better than Islamic ones. Quite a number of studies reported Islamic indices perform better than conventional indices (Ho et al, 2013; Shubbar, 2010 and Reddy and Fu, 2014). There were others that found no difference between both indices (Ajmi et al 2014, EL-Mosaid & Boutti, 2014, Miniaoui, Sayani & Chaibi, 2015).Hussein (2004) reported that Islamic index yields positive abnormal returns in bullish period and underperforms its conventional counterparts in bearish period. Ridwan (2009) came up with an inconclusive result as to which is riskier between Islamic and conventional indices .

Following the work of Ho et al (2013), Merdad (2012) and Albaity and Ahmad (2011) this study examined the risk and risk–adjusted return performances, volatility, and leverage effect, and the effect of US macroeconomic factors on 22 selected conventional and Islamic indices in 11 countries comprising US, EU, Canada, Japan, Taiwan, China, Qatar, India, Kuwait, Malaysia and Turkey. To ensure valid comparisons, the selected Islamic indices were matched with their conventional indices .

1.2 Statement of the Problem The stock market crash during the subprime global crises of 2008 demonstrated the financial contagion of shocks and interconnectivity of world stock markets. Although the subprime crises emanated from real estate markets in the United States, it sporadically spread all over the world affecting both developed and developing nations including emerging stock markets like Turkey, India, Malaysia, Qatar, Kuwait, China, etc. (Saadaoui & Boujelbene, 2015). As the global crises escalated and took a global 5 dimension, it devastated the real economy with a general downturn, the value of assets crashed in the global stock markets, inflicting substantial losses to investors running in to billions of dollars (Hussain, Shahmoradi & Turk, 2016). Given its financial strength and influence, volatility shocks from the US were easily transmitted to the rest part of the world as observed during the subprime crises. Ahlgren & Antell (2010) observed that one of the main features of globalization and swift transmission of information across markets is the extension of financial crises from one country to the other even if the macroeconomic fundamentals are different. Indeed, investors need a guide line to effective and less risky investment that can withstand market shocks .

Two decades ago investors in stock markets had limited choices as only conventional stocks were available but as time went by Islamic stocks were ushered in the market as alternative investments. The Dow Jones and FTSE were the first major conventional indices that created Islamic indices as alternative investment opportunities to investors .

This ushered Islamic indices such as Dow Jones Islamic Market Index (DJMI) in 1999 and FTSE in 1998 as global Islamic Index Series that only incorporates stocks that comply with Islamic principles. Theoretically, Islamic stock indices were better positioned to be more resilient to shocks due to specific features such as ethical and ratio screenings, the exclusion of the financial sector and of highly-leveraged firms, the limit on interest-based leverage, and, finally, the exclusion of investing in complex excessively risky subprime and toxic assets, as well as zero-sum betting on derivatives (Ata & Bugan, 2015 and Saiti, Bacha & Masih, 2016). By promoting risk sharing (as opposed to risk transfer) and endorsing investment in wealth creating activities, the asset-based nature of Islamic financing naturally curbs excessive leverage. It also restricts Islamic banks from investing in highly leveraged assets and short selling, 6 suggesting that they are likely to foster financial stability and render the global financial system less prone to financial distress. The direct link between the financial and the real or trade sectors may also prevent technical speculations and potential bubbles (Hussain, Shahmoradi & Turk, 2016) .

However, the literature is loaded with contradictory opinions on the hypothesized resilience of the Islamic indices. On one hand, some argued that Islamic indices offered relatively more stability as they were less volatile and were able to adapt themselves with the market fluctuations and changes. Further, the screening and filtering process of Islamic indices, risk-sharing and asset-based financing, should presumably make them more resilient than the conventional ones during financial crisis (Arshad & Rizvi, 2013 and Pranata, 2015). While on the other hand, some scholars cast doubt on the ability of Islamic indices to perform as well as the conventional ones due to the smaller size of the investment pools relative to the conventional asset markets. In addition, giving its lower diversification potential as well as the higher costs of Islamic compliant portfolio selection, one may suggest that these investments would underperform the conventional ones (Bauer et al., 2005) .

Even though the focus of this study is not the global financial crises or its effect on both indices, but its occurrence and aftermath intensified the debate on which of the indices outperforms the other in terms of risk, volatility and response to macroeconomic shocks from the US. A preview of information and data available on the official website of the Wall street journal indicated that both conventional and Islamic indices were affected terribly by the crises. For instance, the data revealed that the major stock market crash of 2008 occurred on 29th September, 2008 corresponding to when the Lehman Brothers declared bankruptcy. The Dow Jones Industrial Average index (DJIA) fell 777.68 points 7 in intraday trading which was its largest point drop in history, closing around 10, 000 points for the first time since 2004. By the end of December 2008, Dow further crashed to 8, 776.39 down almost 34% for the year. On March 5th 2009, Dow dropped by more than 50% to its bottom of 6,594.44 point. (The and .

Similarly Dow‘s Islamic counterpart, Dow Jones Islamic Market Index (DJIMI) was increasing since 2004 until it suddenly declined in a dramatic way in 2008 due to the financial crisis. Though it began to rise again by the beginning of 2009, however the level of recovery was low in comparison with the index level just before the crisis began. Since both indices declined drastically during the crises, it could suggest a strong correlation between them and the US macroeconomic fundamentals .

The behaviour of FTSE 250 GBP during the subprime crises wasn‘t much different from that of the Dow Jones. It lost about 24% of its value for the year on 29th September 2008 by dropping to 10, 365.45 points as against 12, 800 points on January 1st, 2008. This suggests the possibility of contagion between the US based Dow Jones and the British FTSE index. The Shariah compliant product of the FTSE, FTSE Shariah All-World index, fluctuated in the first 6 months until it reached its peak in the mid of May 2008 .

Then, it suddenly declined sharply till the end of Febreuary 2009 due to the 2008 subprime crisis and its impacts. However, the index rose steadily at the beginning of March 2009, but the recovery rate was slow relative to the pre-crisis period. This also suggests some level of correlation between the conventional indices and its Islamic counterpart, since they both responded to the shock in a similar manner .

The problematic here is, once there is evidence of correlation between conventional and Islamic indices then it undermines the benefit of diversification as postulated by the Markowitz theory. Meaning that, there is no incentive for investors to combine both 8 conventional and Islamic indices in the same portfolio as it would not guarantee hedging against risk or higher returns. Secondly, the information from the wall street journal, suggests that both conventional and Islamic indices were affected by the subprime crises in the US and with the possibility of contagion from the US to other countries as observed in the FTSE. Therefore, the ongoing debate as to which of the indices amongst the two is more resilient to volatility shocks can only be settled through more empirical works of this manner. Thirdly, since the focus of this study is on Dow Jones and FTSE which were the first major global indices to float Islamic counterparts and have wider global presence in many countries, it‘s important to investigate how the US macroeconomic variables affect their volatilities because their basis point is measured in US dollars. There could be the possibility of linkage between US macroeconomic factors and the price fluctuations of these indices. Fourthly, since it appears from the available information, that the recovery rate of both indices after the crises was slow, it gives reasons to investigate leverage effect. The presence of leverage effect will suggests that bad news has greater influence on the price of the stocks than good news .

When a substantial decline in an equity price is not matched by a decline in the value of debt, the firm‘s debt to equity ratio will increase alongside with the financial risk of the firm‘s investors .

Markowitz theory suggests that the benefit of diversification of portfolio improves hedging against risk. The debate over whether Islamic and conventional indices are substitutes or complementary in terms of portfolio diversification benefits is ongoing .

That is, whether Islamic indices represent an alternative class of investment with distinctive characteristics that allow investors to obtain effective diversification benefits and downside risk reductions. Giving fresh perspective to this debate is the central thesis 9 in this study. The motivation of this study is to report findings from a comparative study of both types of investments since this issue has yet been bedded down .

Thus, the following research questions were designed to guide this study: i. What is the nature of the long-run relationship between conventional and Islamic indices, and the US macroeconomic variables? ii. Is there leverage effect (asymmetry), volatility reaction to the market and volatility persistence amongst conventional and Islamic indices? iii. What is the effect of US macroeconomic variables on the volatility of conventional and Islamic indices? iv. What are the risk-adjusted return performances of conventional and Islamic indices? 1.3 Objectives of the Study The broad objective of this study is to examine the portfolio performance of conventional and Islamic indices. However, other specific objectives include the following: i. To determine the long-run relationship between conventional and Islamic indices, and the US macroeconomic variables ii. To analyze the leverage effect (asymmetry), volatility reaction to the market and volatility persistence of conventional and Islamic indices iii. To determine the effect of US macroeconomic variables on the volatility of the conventional and Islamic indices .

iv. To examine the risk and risk-adjusted return performance of conventional and Islamic indices .

10 1.4 Research Hypothesis The study tested the following hypotheses: H01: There is no long-run relationship between conventional and Islamic indices, and the US macroeconomic variables H02: There is no leverage effect, volatility reaction, volatility persistence of conventional and Islamic indices H03: There is no significant effect of US macroeconomic variables on the volatility of the conventional and Islamic indices .

H04: There is no significant difference in the risk and risk-adjusted return performances of conventional and Islamic indices .

1.5 Justification of the Study The motivation of this study arises from the growing interest in Islamic finance and the increasing innovation and introduction of Islamic financial assets in the global stock markets. Investors and policymakers would be interested in factual information to serve as their guide in investment decisions and portfolio management. This is especially important given the uncertainty of the financial market with looming crises surfacing not only in emerging but also in developed markets. The study developed a conceptual framework that could be used to analyze portfolio investment choices containing conventional and Islamic stock given the nature of their stochastic properties, volatilities and effects of macroeconomic variables .

The selection of the macroeconomic variables for inclusion in the analysis was governed by the time series that are commonly included in studies of stock return predictability. It is assumed that stock market behavior is related to macroeconomic conditions as 11 postulated by the Arbitrage Pricing Theory (APT). It will be quite tedious to consider all possible macroeconomic variables, therefore, this study is limited to the following US factors: Brent oil price as a measure of oil market influence on stock prices, US Economic Uncertainty Index (EUI) to measure US policy response to economic and political news (Nazlioghu, Hammoudeh and Gupta, 2013), Federal Funds Rate (FFR) as proxy for monetary policy influence on stock markets and, volatility and fear index (VLF) to capture anxiety on US stock market. These four variables were all used in Nazlioghu, Hammoudeh and Gupta (2013:7). To build on their work, this study reasoned with Ejaz and Akhtar (2015) and included US three months Treasury bill to measure short-term interest rate. In addition, as in Khositkulporn (2013), Abugri (2002), Caner and Onder (2005), and Granger, Huang and Yang (2000) the study added US inflation rate, and money supply .

From the reviews done so far by the researcher, it seems only limited researches have been undertaken that examined the volatilities of conventional indices with Islamic indices using global cross-country data. Most of the studies encountered in the literature that studied the nexus between Islamic and conventional indices used performances measures of Sharpe ratio, Treynor index and Jensen alpha as their methodologies of comparison (e.g. Ho et al 2013, Shubbar 2010, Ajmi et al 2014, Hussein 2004, Hussein 2005, Hoepner et al 2011, and Hassan and Girard 2011). The methods employed in these studies were only ratios that give idea on the risk – adjusted returns of the two indices. It does not give a detail account of the effect of volatilities typically associated with the stylized facts of financial data .

However, a number of studies improved on this by employing GARCH models to study the volatilities of conventional and Islamic indices and the relationships therein, for 12 instance Arshad and Raza 2013, Miniaoui, sayani and Chabi 2015, Albaity and Ahmad 2011, Al-Zoubi and Maghyereh 2007 and Reddy and Fu 2014. Even though these studies employed the GARCH models including GARCH-M, EGARCH and the TARCH models which are considered sufficient in capturing volatility, and leverage effect of stock market indices none of these studies used the cross-country data and the period covered in this study. Again none of these studies used the conceptual framework developed in this study that related the combine effects of volatility, macroeconomic variables, and leverage effect on the stock returns volatility of conventional and Islamic indices using cross country data .

Drawing from the literature reviewed, undoubtedly there is a growing focus on the linkages between Islamic and conventional finance markets but the empirical conclusions seems to be inconclusive. These mixed results could be attributed to time periods, data sets, frequencies, methodologies and model descriptions. Thus, this study attempted to fill the literature gap in that respect .

Notably, the study extended the findings of Caner and Onder (2005) on factors affecting volatility in stock market, the works of Koutmos (1996), Koutmos and Booth (1995), and Booth, Martikainen and Tse (1997) on leverage effects, and the work of Khositkulporn (2013) on the factors affecting stock market volatility , the findings of Papapetron (2001), Sadorsky (2001), Chen (2009), Brouwer (2003), Wang and Lin (2009), Diebold and Yilmaz (2008) and Longstaff (2010), Basher and Sadorsky (2006) and Nandha and Faff (2008) on oil price fluctuation and the equity market .

The study has potential to benefit regulators, fund managers, investment analysts, and general investors in terms of gaining better understanding of the effect of volatility on 13 the risk and returns of conventional and Islamic stock indices, as well as the factors determining their volatilities. The findings from this study will provide investors some valuable guidelines regarding optimal portfolio investment choices between conventional and Islamic stocks. It‘s also hoped that this study will serve as a springboard for more researches in the area of portfolio management .

1.6 Scope and limitations of the Study The study examined the effects of volatility, leverage effects, and macroeconomic variables on the risk and returns of conventional and Islamic indices for the period 2006 to 2017. Data was obtained from 11 countries for both Islamic and conventional indices .

It was discovered that most countries do not have Islamic indices or do not have data on it before 2006; therefore, the study was constrained to begin its analysis from 2006 that was two years before the US mortgage financial crises. Emphasis was given to the Dow Jones index for two reasons. First it has the widest global coverage across countries and secondly, it‘s the index that has the Islamic counterpart in most countries. Dow Jones launched its first Islamic market index in 1999 which includes stocks from 34 countries and covers 10 economic sectors, 18 market sectors, 51 industry groups and 89 subgroups defined by the Dow Jones Global Classification Standard. It‘s only when data on Dow Jones was not available that a substitute preferably FTSE was used. FTSE is another index that also has a global representation in 29 countries and has 15 Islamic indices. It was in 1998 that the FTSE, launched FTSE Global Islamic Index Series (GIIS) which is a subset of the FTSE All-World Index group .

In this regard search through the data base of the Wall Street Journal for countries that have a pair of conventional and Islamic indices led to the selection of the following 14 countries as the sample: United States, European Union, France, Japan, Canada, Turkey, Kuwait, India, Qatar, Taiwan and Malaysia. All these countries have robust economies and flourishing stock markets; therefore they provide strong bases for making empirical comparison of the performances of conventional and Islamic indices that covers the period 2006 – 2017 .

1.7 Organization of Chapters The work is organized into five chapters; chapter one contains the general introduction comprising the statement of problem, the research objectives, the hypotheses and the scope and limitations of the study. Chapter two gives the conceptual literature explaining the key concepts related to the study; the theoretical literature reviewed four theories relevant to the study comprising modern portfolio theory (MPT), capital asset pricing model (CAPT), arbitrage pricing model (APT) and market efficiency theory (MET); the empirical literature was grouped into studies diversification, studies on riskreturn of conventional and Islamic indices, studies on risk-return of conventional and Islamic indices, studies on volatility of conventional and Islamic indices, and studies on macroeconomic variables. This chapter also contains the theoretical framework. Chapter three outlined the conceptual framework, data sources, variables measurement and models specification. Chapter four presents results and discussions and finally, chapter five contains the summary, conclusion and recommendations .




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