Are Islamic stock markets efficient? A time-series analysis

Abstract

This article investigates the weak-form informational efficient hypothesis for three major Islamic stock markets (world, emerging and developed). Unlike previous studies, we applied different parametric and nonparametric tests to investigate efficiency in the short and long horizons. Using recent data over the period May 2002-June 2012, we developed a time-series analysis of Islamic stock price dynamics in the context of the recent global financial crisis (2008-2009). Our analysis offers two interesting results. First, emerging Islamic stock markets seem to be less efficient than developed Islamic markets, suggesting interesting investment opportunities and diversification benefits from this region in both the short run and the long run. Second, nonrejection of the cointegration hypothesis for developed Islamic markets and the global conventional stock market point to efficiency for the former in the long term, even if it is inefficient in the short term. This finding has at least two economic and political implications: (i) investors who seek moderate risk would do well to opt for Islamic funds in developed countries, particularly as they share the same tendency and provide similar expected returns in the long term as conventional funds, (ii) Islamic financial systems can offer a useful model that can help to reform and remodel conventional financial institutions.