The Malaysian Islamic stock market : a study on performance and the conditional capital asset pricing model

Abstract

The progress in the Malaysian Islamic capital market (ICM) is the envy of the international community since Malaysia is now regarded as one of the leading centers for Islamic finance. To maintain this position, research on the present market is imperative. Hence, this two-part study is undertaken to fill that role. The first part evaluates the performance of Kuala Lumpur Shariah Index (KLSI) and RHB Islamic Index (RHBII) against the market benchmark, Kuala Lumpur Composite Index. To that end, the method employed involves the measurement of performance; and measurement of risk, selectivity and timing. The second part tackles the issue of beta relevancy in describing returns. The capital asset pricing model (CAPM) in the traditional and conditional forms are examined in addressing this issue. Our research also seeks to discover the characteristics of beta for sharīc ah-compatible securities. For this, the ordinary least squares and generalized method of moments estimation techniques are utilized. To achieve these goals, the phase from April 1999 until June 2005 is treated as the sample period. The findings show that the Islamic betas are positive and less than one. More importantly, the results reveal that KLSI is of poorer quality than RHBII and both Islamic indices are not market competitive. Furthermore, there is evidence for the significance of beta from the results of not only the traditional CAPM, but also the conditional CAPM. Thus, we conclude by confirming the relevance of beta for the exploits of the practitioners and by critically arguing that FTSE Bursa Malaysia EMAS Shariah Index and FTSE Bursa Malaysia Hijrah Shariah Index might not be good enough in alleviating our concern on KLSI. Therefore, the Islamic version of the FTSE Bursa Malaysia 100 Index is proposed to stimulate more encouraging developments for the Malaysian ICM.