Idiosyncratic Risk of Investing in Islamic Capital Market Equities

Abstract

This article investigates the idiosyncratic risk of investing in Islamic capital market equities. It aims to answer the question: do stocks included (excluded) in the Shari’ah Index have higher (lower) idiosyncratic risks? We used the FTSE Bursa Malaysia EMAS Shari’ah Index (FBMEI) launched in 2007 to investigate whether stocks added and deleted from this Shari’ah-compliant index had higher or lower idiosyncratic risks. The estimation results show that the idiosyncratic risk of stocks added to the FBMEI was high during the bearish market and low during the bullish market. Our estimation results from a rolling regression show that, on average, idiosyncratic risk for the stocks deleted from the FBMEI is relatively higher compared to idiosyncratic risk for the stocks added to the FBMEI.