Momentum Strategies in Shari’ah-Compliant Stocks: The Role of Debt

Abstract

This article examines whether investors can execute profitable momentum strategies using Shari’ah-compliant stocks to enhance returns. We find no significant profits from either the traditional return-based momentum strategy or the turnover-based momentum strategy for Shari’ah-compliant stocks from 1996 to 2009. Such nonexistence of momentum profits for Islamic equities can be attributed to their low level of debt, higher level of transparency, and the endorsement effect from the Shari’ah independent supervisory board. Our results are consistent with the credit-rating hypothesis in Avramov et al. [2007] that low-credit firms drive momentum profits.