Do momentum strategies perform better for Islamic stocks than for conventional stocks across market states?

Lain-Tze Tee, Si-Roei Kew, Soo-Wah Low
2019 Ekonomski Anali  
This study compares the momentum profitability of Islamic and conventional stocks in Malaysia and examines whether the presence of momentum profits is market-state dependent. Winner portfolios are shown to outperform loser portfolios, suggesting that a momentum effect exists in the equity market. Islamic stocks exhibit stronger momentum than conventional stocks. Interestingly, although pursuing profit is not the primary goal of Islamic stock investors, the findings indicate that momentum
more » ... hat momentum profits for all Islamic stock trading strategies are higher than those for conventional stocks. The profits from momentum strategies for both stocks are market-state dependent. In all trading strategies, while there are significant positive momentum profits following market upturns, there is no evidence of profits subsequent to market downturns. Overall, Islamic stocks yield higher momentum profits than conventional stocks across market states. These findings are robust to using various measures of the state of the market. While the presence of momentum profits is also robust to the inclusion of Fama-French's (1993) risk factors, the risk factors are unable to explain momentum profits, suggesting that the risk-adjusted momentum profits are not due to risk compensation. Rather, the profitability is evidence of stock mispricing.
doi:10.2298/eka1921107t fatcat:3a4jxuf2undgnjebt5bn4gtyhq