A proposal for creating an Islamic stock index in Borsa İstanbul

Islamic stocks refer to stocks that are in compliance with the shariah compliant stocks screening. There are two stages of the shariah compliant stocks screening; business activity screening and financial ratio screening. The criteria that are used in the shariah compliant stocks screening are determined by international rating agencies and the shariah boards of index providers. In practice, shariah boards may adopt different criteria from each other. The most significant difference between these criteria is related to firm value which is used in financial ratios during the financial ratio screening and the question is whether the book value or the market value of a company shall be used as denominator. In this study, firstly, the effect of using book value and market value (12, 24 and 36 month average market value) as the firm value is examined. In this context, the financial data of the 330 companies from 40 sectors in the BIST All index for the 2008Q1-2018Q2 periods were utilized and shariah compliant stocks screening was performed. Secondly, two new models were proposed based on prudence and liberal approaches. Accordingly, while in prudence approach minimum index dividing value is accepted as firm value, in liberal approach, maximum index dividing value is accepted as firm value and shariah compliant stocks screening was performed based on these two newly formed portfolios. In this regard, six different portfolios were formed in line with four different dividing values and two new model proposals and Islamic stock indices were created from these portfolios. Finally, the decomposition hypothesis that Islamic stock markets are differentiated from conventional stock markets has been tested. For this BIST100 index was used to represent the conventional stock markets. The MV-GARCH model was established between Islamic stock indices and BIST100 indices and dynamic conditional correlation coefficients (DCC) were obtained from the model. In general, the findings of the study show that there are serious differences between the shariah compliant stocks screening criteria and these differences lead to serious differences in the sectoral distribution of the portfolios and the firm composition in the portfolio; however these differences did not have a significant effect on the validity of the divergence hypothesis between the yield series of indices -which obtained using a holistic approach- and the conventional markets.