Capital Asset Pricing Model and Shariah-Compliant Capital Asset Pricing Model: Evidence from Pakistan Stock Exchange
Keywords:
CAPM, Shariah-Compliant Capital Asset Pricing Model, GMM, Zakat, Size AnomalyAbstract
The key objective of this study is to recommend a novel approach in pricing Shariah based financial assets by testing Shariah-Compliant Capital Asset Pricing Models which can potentially replace the conventional CAPM in PSX. Using eighteen years extracted data from Thomson Reuters Data Stream over the period of January 2001 to December 2018 and by deploying Generalized Method of Moments (GMM), this study develops and analyses Shariah-Compliant Capital Asset Pricing Model. The returns of the stocks traded on PSX are calculated through the CAPM equation with Risk-Free Rate, without Risk- Free Rate, Zakat, NGDP and Inflation. The impact of size anomaly is also gauged in the study. The findings are surprising and specify that the Shariah CAPM can be the alternate of the conventional CAPM. The results of this study may show a new way to the investors, corporates and banks to calculate the required rate of returns of their securities.
Downloads
References
Ahmad, N., and Azhar, N. N. (2015). Investigating of Shariah compliant companies Capital Structure determinants. Advanced Science Letters, 21(6), 1986–1989.
Ahmad, Z., and Ibrahim, H. (2002) A study of performance of the KLSE Syariah Index. Malaysian Management Journal, 6 (1and 2). 25-34.
Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). The Cross-Section of Volatility and Expected Returns. The Journal of Finance, 61(1), 259–299.
Bauer, R., Derwall, J. and Otten. R. (2007). The ethical mutual fund performance debate: New evidence from Canada. Journal of Business Ethics, 70(2), 111-124
Bali, T. G., Cakici, N., & Whitelaw, R. F. (2011). Maxing out: Stocks as lotteries and the cross-section of expected returns. Journal of Financial Economics, 99(2), 427–446.
Derbali, A., Khaldi, A., Jouini., F. (2017) Shariah-compliant capital asset pricing model: New mathematical modeling. Journal of Asset Management, Palgrave Macmillan, 18 (7),527 - 537.
Drew, M. E., Malin, M., Naughton, T., & Veeraraghavan, M. (2006). Idiosyncratic volatility and security returns: evidence from Germany and United Kingdom. Studies in Economics and Finance, 23(2), 80–93.
Erdinc, Y. (2017). Comparison of CAPM, Three-Factor Fama-French Model and Five- Factor Fama-French Model for the Turkish Stock Market. Financial Management from an Emerging Market Perspective.
Eugene, F. F., & French, K. R. (2014). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1-22.
El-Ashker, A. (1987), The Islamic Business Enterprise, Croom Helm Ltd, London.
Eatzaz and Attiya, (2008). Testing Multifactor Capital Asset Pricing Model in Case of Pakistani Market. International Research Journal of Finance and Economics, 25, 114- 138
Fama, Eugene F., and Kenneth R. French. (1993). Common risk factors in the returns on bonds and stocks, Journal of Financial Economics 33, 3-53.
Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1–22.
Farooq, O., and AbdelBari, A. (2015). Earnings management behavior of Shariah- compliant firms and Non-Shariah-compliant firms. Journal of Islamic Accounting and Business Research, 6(2), 173–188.
Farooq, O., and Alahkam, A. (2016). Performance of shariah-compliant firms and Non- Shariah-compliant firms in the MENA region. Journal of Islamic Accounting and Business Research, 7(4), 268–281.
Griffin, J. M. (2002). Are the Fama and French Factors Global or Country-Specific?
The Review of Financial Studies, 15(3), 783.
Hanif, M. (2011). Risk and Return under Shari‟a Framework: An Attempt to Develop Shari‟a Compliant Asset Pricing Model (SCAPM). Pakistan Journal of Commerce and Social Sciences, (5)2, 283-292.
Hanif, M., and Bhatti, U. (2010). Validity of Capital Assets Pricing Model: Evidence from KSE-Pakistan, European Journal of Economics, Finance and Administrative Sciences, 20, pp 140-153.
Hakim, A., S., Hamid, Z. and Meera, M., A. (2016). Capital Asset Pricing Model and pricing of Islamic financial instruments. Journal of King Abdulaziz University: Islamic Economics, 29(1), 21-39.
Hasan, M. and Dridi, J. (2011). The effects of the global crisis on Islamic and conventional banks: a comparative study. Journal of International Commerce,
Economics and Policy,2(2),163-200
Hanif, M., & Dar, J. (2011). Comparative Testing of Capital Asset Pricing Model (CAPM) and Shari‟a Compliant Asset Pricing Model (SCAPM): Evidence from Karachi Stock Exchange. Pakistan. SSRN Electronic Journal, (10),1-14.
Ikenberry, D., Lakonishok, J., & Vermaelen, T. (1995). Market underreaction to open market share repurchases. Journal of Financial Economics, 39(2-3), 181–208.
Haq, I., and Rashid, K. (2014), Stock Market Efficiency and Size of the Firm: Empirical Evidence from Pakistan, Oeconomics of Knowledge, 6 (1), 10-31.
Kahf, Monzer. (2006). Maqasid al Shariah in the Prohibition of Riba and their Implications for Modern Islamic Finance, Paper presented at IIUM International Conference on Maqasid al Shari'ah, Malaysia, August 8-10.
Loughran, T., & Ritter, J. R. (1995). The New Issues Puzzle. The Journal of Finance, 50(1), 23–51.
Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.
Narasimham, J., and Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency, Journal of Finance 48, 65-91.
Newey, W., West, K., (1987). Hypothesis testing with efficient method of moments estimation. International Economic Review 28, 777-787.
Pastor., L., and Stambaugh, R., F. (2003). Liquidity Risk and Expected Stock Returns,Journal of Political Economy 111 (3), 642-685.
Ramli, N., and Haron, R. (2017). Debt Determinants of Shariah Approved Firms: Empirical Evidence from Malaysia. Journal of Islamic Finance (Special Issue), 6(1), 188–204.
Sadaf, R., & Andleeb, S. (2014). Islamic Capital Asset Pricing Model (ICAMP).
Journal of Islamic Banking and Finance, 2(1), 187-195.
Schulmerich, M., & Hwa Eu, C. (2014). Modern Portfolio Theory and Its Problems.
Berlin: Springer Berlin Heidelberg.
Selim, T. (2008). An Islamic capital asset pricing model. Humanomics, 24(2), 122129
Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442 .
Sloan. R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review 71: 289-315.
Treynor, J. L. (1961). Market Value, Time, and Risk. SSRN Electronic Journal. doi:10.2139/ssrn.2600356
Tomkins, C, and R. Karim. (1987). The Shariah and its Implications for Islamic Financial Analysis: An Opportunity to Study Interactions Among Society, Organization, and Accounting', The American Journal of Islamic Social Sciences, 4 (1).
Downloads
Published
How to Cite
Issue
Section
License
You are free to:
- Share — copy and redistribute the material in any medium or format for any purpose, even commercially.
- Adapt — remix, transform, and build upon the material for any purpose, even commercially.
- The licensor cannot revoke these freedoms as long as you follow the license terms.
Under the following terms:
- Attribution — You must give appropriate credit , provide a link to the license, and indicate if changes were made . You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use.
- No additional restrictions — You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits.
Notices:
You do not have to comply with the license for elements of the material in the public domain or where your use is permitted by an applicable exception or limitation .
No warranties are given. The license may not give you all of the permissions necessary for your intended use. For example, other rights such as publicity, privacy, or moral rights may limit how you use the material.
