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Shari’ah screening, market risk and contagion : a multi-country analysis.

El Alaoui, A.O. and Bacha, O.I. and Masih, M. and Asutay, M. (2016) 'Shari’ah screening, market risk and contagion : a multi-country analysis.', Journal of economic behavior and organization., 132 (Supplement). pp. 93-112.


This study investigates the relationship and shock transmission between firm leverage and systematic risk within the Shari’ah stock screening rules among seven European countries with a sample of 689 firms for the period from 2008 Q2 to 2013 Q1. Due to the fact that high leverage augments systematic risk and accentuates the firm’s vulnerability to shocks, debt screening is used to examine the sampled portfolios. As it imposes limits on debt, we examined the impact of such an ethical screening and a risk moderating principle on stock volatility, susceptibility to contagion and the implications for portfolio diversification. Using a vector autoregressive dynamic panel of multi-country framework, systematic risk is analysed by taking into account firm characteristics, country effects, and the heterogeneity across firms, thereby ensuring the robustness of results. Our findings suggest that the systematic risk changes with changes in the capital structure; the Shari’ah-compliant stocks are shown in most cases to carry less risk than conventional stock, while they do not necessarily out-perform in terms of return; during the global financial crisis. We conclude that during the global financial crisis, Islamic compliant stocks demonstrated lower values of systematic risk in the case of ‘Low Debt’ portfolios when comparison to ‘High Debt’ portfolios.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Publisher statement:© 2016 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:23 October 2016
Date deposited:12 December 2016
Date of first online publication:05 November 2016
Date first made open access:05 May 2018

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