The risk comparison of islamic and conventional indices: Value at risk approach

The concept of risk has recently started to gain more attention with the effect of global financial crises. Islamic financial instruments and markets have gained a strong momentum with the 2008 financial crisis and are becoming increasingly more important in the global financial industry. The increasing importance of financial risk and the potential of Islamic finance to be an alternative to the conventional finance in regard to risk management have encouraged the researcher to make a comparison between Islamic finance and conventional finance in terms of risk profile. In this study, the risk levels of local and global Islamic indices which are created in line with the principles of Islamic finance were compared to the equivalent conventional indices. Value at Risk method which is widely used by financial institutions as of today was used to compare six indices risk levels, . For Turkey, Katılım30-Bist30, Katılım50-Bist50 and ZPY Katılım-Bist100 index pairs; for the global indices in the World, DJ World Islamic-DJ World, FTSE World Shariah-FTSE World and S&P500 Shariah-S&P500 World index pairs' historical daily closing data between years of 2014-2020 were used to calculate and compare their VaR's. As a result, it has been determined that for all three index pairs in Turkey, Islamic indices have lower risk levels than their equivalent conventional indices. However, for three index pairs in the world, it has been determined that there is no significant difference between Islamic indices and their equivalents conventional indices in terms of risk levels.