Relationship and performance analysis among conventional and Islamic stock indices

Islamic stock indices, which have a deep-rooted history in international capital markets, were developed to include investors with religious sensitivities in the investment environment. Islamic stock indices, created by filtering conventional stocks on the basis of islamic finance rules, have also been the focus of attention of investors from all profiles. In this study, it is aimed to determine the cointegration and causality relations and return performance differences among conventional and islamic stock indices to be evaluated in terms of risk management and diversification possibilities. In this context, the daily closing prices of conventionaland islamic stock indices in Turkey, England, USA, Japan, China, Russia, Malaysia, India and Brazil in the period of 06.01.2011- 30.09.2021 in US Dollars were converted into return series. Preliminary findings regarding structural breaks were determined by CUSUMSQ analysis based on modeling of yield series, and break dates were determined by Carrion-i Silvestre unit root test. Johansen cointegration and Granger causality analyzes were applied to the Japan series in which no structural break was detected, Maki cointegration and Toda-Yamamoto causality analyzes were applied to the 8 country series with breakages. Return performances were analyzed with the Risk Adjusted performance measures Sharpe, Treynor, and Jensen Alpha. As a result of the analysis, at least 2 cointegration vectors among the conventional and islamic stock index returns of each country; A one-way causality relationship was found among the conventional stock index returns of Russia and Brazil to the islamic stock index returns, and a bidirectional causality relationship between the conventional and islamic stock index returns of the other 7 countries. Conventional stock indices provided the highest average return in the 2011-2021 period, and islamic stock indices in the COVID-19 period. Conventional stock indices have higher systematic risk and volatility. According to each performance criterion, in general, the conventional stock index performed better than the islamic stock index. In this context, by supporting the linear relationship among risk and return assumed in the Modern Portfolio Theory, conventional stock indices are preferable for investors aiming for high returns in the long run; Due to causality and cointegration relations, it is anticipated that diversification with conventional and islamic stock indices will not be beneficial in terms of risk management. Keywords: Conventional and Islamic Indices, Cointegration, Causality, Risk and Return, Risk-Adjusted Performance