Ethical Dow Jones indexes and investment performance: international evidence

This study examines the relative importance of the Shariah-Compliant Dow Jones market indexes to capture the dynamic behavior of stock returns at economy and industry levels. The analysis indicates that ethical investment has only an insignificant influence on the performance of stock market returns for both the economy and industry levels. Further, alternative measures of investment performance including the Carhart and Habit Formation models have been used to examine the behavior of the Shariah-Compliant Dow Jones market indexes. The findings suggest a negative market timing ability with both Islamic and conventional indexes. While Islamic indexes are growth focused, conventional indexes are value focused. Further, when investigating the performance of Islamic and conventional Dow Jones indexes during the recent financial crisis, there is evidence supportive of Islamic indexes against conventional ones. For sector groupings, the results indicate that parameter estimates are not consistent, suggesting that Islamic indexes are sector oriented. These results are explained to be a consequence of less diversification in Islamic indexes, leading to higher risk in some sector groupings such as technology and consumption services.